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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
 
     
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2007
Commission file number: 1-7182
Merrill Lynch & Co., Inc.
(Exact name of Registrant as specified in its charter)
 
     
Delaware
  13-2740599
(State or other jurisdiction of incorporation or organization)
  (I.R.S. Employer Identification No.)
     
4 World Financial Center, New York, New York
  10080
(Address of principal executive offices)
  (Zip Code)
 
Registrant’s telephone number, including area code: (212) 449-1000
     
     Securities registered pursuant to Section 12(b) of the Act:
   
Title of Each Class
  Name of Each Exchange on Which Registered
Common Stock, par value $1.331/3 per share   New York Stock Exchange
Chicago Stock Exchange
     
Depositary Shares representing 1/1200th share of Floating Rate Non-Cumulative Preferred Stock, Series 1; Depositary Shares representing 1/1200th share of Floating Rate Non-Cumulative Preferred Stock, Series 2; Depositary Shares representing 1/1200th share of 6.375% Non-Cumulative Preferred Stock, Series 3; Depositary Shares representing 1/1200th share of Floating Rate Non-Cumulative Preferred Stock, Series 4; Trust Preferred Securities of Merrill Lynch Capital Trust I (and the guarantees with respect thereto); Trust Preferred Securities of Merrill Lynch Capital Trust II (and the guarantees with respect thereto); Trust Preferred Securities of Merrill Lynch Capital Trust III (and the guarantees with respect thereto); Depositary Shares, Each Representing a 1/1200th Interest in a Share of Floating Rate Non-Cumulative Preferred Stock, Series 5; Depositary Shares, each representing a 1/40th interest in a share of 6.70% Noncumulative Perpetual Preferred Stock, Series 6; Depositary Shares, each representing a 1/40th interest in a share of 6.25% Noncumulative Perpetual Preferred Stock, Series 7;   New York Stock Exchange
 
See the full list of securities listed on the American Stock Exchange and The NASDAQ Stock Market on the pages directly following this cover.
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “‘smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  þ
Accelerated filer  o Non-accelerated filer  o Smaller reporting company  o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of the close of business on June 29, 2007, the aggregate market value of the voting stock, comprising the Common Stock and the Exchangeable Shares, held by non-affiliates of the Registrant was approximately $71.7 billion.
 
As of the close of business on February 15, 2008, there were 969,007,029 shares of Common Stock and 2,542,982 Exchangeable Shares outstanding. The Exchangeable Shares, which were issued by Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one basis and entitle holders to dividend, voting and other rights equivalent to Common Stock.
 
Documents Incorporated By Reference:  Portions of the Merrill Lynch Proxy Statement to be filed for its 2008 Annual Meeting of Shareholders to be held April 24, 2008 are incorporated by reference in this Form 10-K in response to Part III.
 
Pages 1 through 16, on which appeared a portion of Merrill Lynch & Co., Inc.’s 2007 Annual Report to Shareholders, are not filed with, incorporated by reference in or otherwise to be deemed a part of this Annual Report on Form 10-K.
 


Table of Contents

Securities registered pursuant to Section 12(b) of the Act and listed on the American Stock Exchange are as follows:
 
11% Callable STock Return Income DEbt SecuritiesSM due February 8, 2010 (payable on the maturity date with The Home Depot, Inc. common stock); Accelerated Return NotesSM Linked to the S&P 500® Index due April 6, 2009; Accelerated Return Notes Linked to the MSCI EAFE® Index due February 6, 2009; Strategic Return Notes® Linked to the Merrill Lynch Factor ModelSM due December 6, 2012; Accelerated Return Notes Linked to the Dow Jones Industrial AverageSM due February 5, 2009; Accelerated Return Bear Market Notes Linked to the Russell 2000® Index due February 5, 2009; 9% Callable STock Return Income DEbt Securities due December 4, 2009 (payable on the maturity date with Exxon Mobile Corporation common stock); STrategic Accelerated Redemption SecuritiesSM Linked to the S&P 500 Index due November 30, 2009; Accelerated Return Notes Linked to the S&P MidCap 400 Index due January 21, 2009; Accelerated Return Notes Linked to the S&P 100® Index due January 21, 2009; Accelerated Return Bear Market Notes Linked to the Russell 3000® Index due January 21, 2009; Accelerated Return Notes Linked to the PHLX Semiconductor SectorSM Index due January 21, 2009; STrategic Accelerated Redemption Securities Linked to the Dow Jones EURO STOXX 50® Index due November 9, 2009; Strategic Return Notes Linked to the Merrill Lynch Factor Model due November 7, 2012; Accelerated Return Notes Linked to the PHLX Gold and Silver SectorSM Index due January 16, 2009; Accelerated Return Notes Linked to the S&P 500 Index due December 4, 2008; Accelerated Return Notes Linked to the Russell 1000® Growth Index due December 4, 2008; Accelerated Return Notes Linked to the MSCI EAFE Index due December 4, 2008; Accelerated Return Notes Linked to the PHLX Gold & Silver Sector Index due December 3, 2008; 9% Callable STock Return Income DEbt SecuritiesSM due September 24, 2009 (payable on the stated maturity date with Caterpillar Inc. common stock); Accelerated Return Notes Linked to the Dow Jones STOXX® Index due November 6, 2008; Accelerated Return Notes Linked to the S&P 500 Index due November 26, 2008; Accelerated Return Notes Linked to the Russell 2000 Index due November 7, 2008; Accelerated Return Bear Market Notes Linked to the Russell 3000 Index due November 7, 2008; 12% Callable STock Return Income DEbt Securities due September 4, 2009 (payable on the maturity date with Apple Inc. common stock); Currency Basket Notes Linked to the Global Currency Basket due February 9, 2009; Accelerated Return Notes Linked to the Nikkei® 225 Index due October 9, 2008; Accelerated Return Notes Linked to the S&P MidCap 400 Index due August 15, 2008; Accelerated Return Bear Market Notes Linked to the Utilities Select Sector Index due October 7, 2008; Accelerated Return Bear Market Notes Linked to the Russell 2000 Index due October 7, 2008; Accelerated Return Notes Linked to the Dow Jones EURO STOXX 50 Index due September 5, 2008; Strategic Return Notes Linked to the Select Ten Index due July 5, 2012; Accelerated Return Notes Linked to the MSCI EAFE Index due September 5, 2008; Accelerated Return Bear Market Notes Linked to the Dow Jones Industrial Average due September 5, 2008; Accelerated Return Bear Market Notes Linked to the PHLX Housing SectorSM Index due September 5, 2008; Accelerated Return Notes Linked to the Nikkei 225 Index due August 6, 2008; Accelerated Return Notes Linked to the Dow Jones EURO STOXX 50 Index due August 7, 2008; Accelerated Return Bear Market Notes Linked to the PHLX Housing Sector Index due August 8, 2008; Accelerated Return Notes Linked to the Russell 2000 Index due August 6, 2008; Strategic Return Notes Linked to the Select Ten Index due May 10, 2012; Accelerated Return Notes Linked to the Dow Jones EURO STOXX 50 Index due July 10, 2008; Accelerated Return Notes Linked to the MSCI EAFE Index due July 9, 2008; Accelerated Return Bear Market Notes Linked to the S&P 500 Index due July 10, 2008; Accelerated Return Notes Linked to the S&P MidCap 400 Index due April 4, 2008; Accelerated Return Notes Linked to the S&P 500 Index due April 18, 2008; Accelerated Return Bear Market Notes Linked to the PHLX Housing Sector Index due April 18, 2008; Accelerated Return Notes Linked to the Nikkei 225 Index due May 8, 2008; Strategic Return Notes Linked to the Select Ten Index due March 8, 2012; Accelerated Return Notes Linked to the Russell 2000 Index due May 5, 2008; 9% Callable STock Return Income DEbt Securities due March 5, 2009 (payable on the maturity date with Best Buy Co., Inc. common stock); Accelerated Return Notes Linked to the S&P 500 Index due April 7, 2008; Strategic Return Notes Linked to the Industrial 15 Index due February 2, 2012; Accelerated Return Notes Linked to the Energy Select Sector Index due February 29, 2008; Dow Jones EURO STOXX 50 Index Market Indexed Target-Term Securities® due June 28, 2010; Accelerated Return Notes Linked to the Dow Jones Industrial AverageSM due March 6, 2008; Strategic Return Notes Linked to the Select Ten Index due November 8, 2011; Nikkei 225 Market Indexed Target-Term Securities due April 5, 2010; Strategic Return Notes Linked to the Baby Boomer Consumption Index due September 6, 2011; Strategic Return Notes Linked to the Value 30 Index due August 8, 2011; Strategic Return Notes Linked to the Value 30 Index due July 6, 2011; 50/150 Nikkei 225 Index Notes due October 7, 2009; Strategic Return Notes Linked to the Industrial 15 Index due August 3, 2009; 8% Monthly Income Strategic Return Notes Linked to the CBOE S&P 500 BuyWrite Index due January 3, 2011; Nikkei 225 Market Indexed Target Term Securities due June 5, 2009; 8% Monthly Income Strategic Return Notes Linked to the CBOE DJIA BuyWrite Index due November 9, 2010; Convertible Securities Exchangeable into Pharmaceutical HOLDRs® due September 7, 2010; Strategic Return Notes Linked to the Industrial 15 Index due August 9, 2010; 8% Monthly Income Strategic Return Notes Linked to the CBOE S&P 500 BuyWrite Index due June 7, 2010; MITTS Securities based upon the Russell 2000 Index due March 30, 2009; Nikkei 225 Securities due March 30, 2009; S&P 500 MITTS Securities due June 29, 2009; MITTS Securities based upon the Dow Jones Industrial Average due August 7, 2009; S&P 500 MITTS Securities due September 4, 2009; 1% Convertible Securities Exchangeable into McDonald’s Corporation common stock due May 28, 2009; Callable MITTS Securities due May 4, 2009 Linked to the S&P 500 Index; Callable MITTS Securities due May 4, 2009 Linked to the Amex Biotechnology Index; Callable MITTS Securities due June 1, 2009 Linked to the Amex Defense Index; Convertible Securities Exchangeable into Exxon Mobil Corporation Common Stock due October 3, 2008; Strategic Return Notes Linked to the Select Utility Index due February 25, 2009; and Strategic Return Notes Linked to the Select Utility Index due September 28, 2009.
 
Securities registered pursuant to Section 12(b) of the Act and listed on The NASDAQ Stock Market are as follows:
 
Strategic Return Notes Linked to the Industrial 15 Index due April 25, 2011; S&P 500 Market Indexed Target-Term Securities, due June 7, 2010; Leveraged Index Return Notes Linked to the Nikkei 225 Index due March 2, 2009; S&P 500 MITTS Securities due August 31, 2011; Strategic Return Notes Linked to the Select Ten Index due June 4, 2009; 97% Protected Notes Linked to Global Equity Basket due February 14, 2012; Strategic Return Notes Linked to the Industrial 15 Index due March 30, 2009; Strategic Return Notes Linked to the Select Ten Index due March 2, 2009; 97% Protected Notes Linked to the performance of the Dow Jones Industrial Average due March 28, 2011; Strategic Return Notes Linked to the Select Ten Index due March 2, 2009; Dow Jones Industrial Average MITTS Securities due December 27, 2010; Nikkei 225 MITTS Securities due March 8, 2011; Strategic Return Notes Linked to the Industrial 15 Index due October 31, 2008; Strategic Return Notes Linked to the Select Ten Index due September 30, 2008; Nikkei 225 MITTS Securities due September 30, 2010; S&P 500 MITTS Securities due September 3, 2008; Market Recovery Notes Linked to the Nasdaq-100 Index; S&P 500 MITTS Securities due August 5, 2010; Strategic Return Notes Linked to the Industrial 15 Index due August 5, 2008; Strategic Return Notes Linked to the Select Ten Index due June 27, 2008; S&P 500 MITTS Securities due June 3, 2010; Strategic Return Notes Linked to the Select Ten Index due February 28, 2008; MITTS Securities based upon the Dow Jones Industrial Average due January 16, 2009; MITTS Securities based upon the Dow Jones Industrial Average due September 29, 2008; S&P 500 MITTS Securities due August 29, 2008;
 
S&P 100 and S&P 500 are registered trademarks of McGraw-Hill, Inc.; EAFE is a registered service mark of Morgan Stanley Capital International Inc.; DOW JONES INDUSTRIAL AVERAGE is a service mark of Dow Jones & Company, Inc.; RUSSELL 1000, RUSSELL 2000 AND RUSSELL 3000 are registered service marks of FRANK RUSSELL COMPANY; PHLX Gold and Silver Sector, PHLX Housing Sector and PHLX Semiconductor Sector are registered service marks of the Philadelphia Stock Exchange, Inc.; STOXX and EURO STOXX 50 are registered service marks of Stoxx Limited; NIKKEI is a registered trademark of KABUSHIKI KAISHA NIHON KEIZAI SHIMBUN SHA. All other trademarks and service marks are the property of Merrill Lynch & Co., Inc.


 

Table of Contents

             
             
Selected Financial Data   19
Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
    Introduction   20
    Executive Overview   22
    Risk Factors that Could Affect Our Business   24
    Critical Accounting Policies and Estimates   27
    Business Environment   31
    Results of Operations   32
      33
      39
      48
    Consolidated Balance Sheets   49
    Off-Balance Sheet Exposures   50
    Contractual Obligations and Commitments   52
    Capital and Funding   53
    Risk Management   60
    Recent Accounting Developments   71
    Activities of Principal Subsidiaries   75
Management’s Discussion of Financial Responsibility, Disclosure Controls and
Procedures, and Report on Internal Control Over Financial Reporting
  77
Report of Independent Registered Public Accounting Firm   79
Consolidated Financial Statements   81
    Consolidated Statements of (Loss)/Earnings   81
    Consolidated Balance Sheets   82
    Consolidated Statements of Changes in Stockholders’ Equity   84
    Consolidated Statements of Comprehensive (Loss)/Income   85
    Consolidated Statements of Cash Flows   86
Notes to Consolidated Financial Statements   87
    Note 1.   Summary of Significant Accounting Policies   87
    Note 2.   Segment and Geographic Information   102
    Note 3.   Fair Value and Trading Risk Management   104
    Note 4.   Securities Financing Transactions   112
    Note 5.   Investment Securities   113
    Note 6.   Securitization Transactions and Transactions with Special Purpose Entities   117
    Note 7.   Loans, Notes, and Mortgages and Related Commitments to Extend Credit   122
    Note 8.   Goodwill and Intangibles   125
    Note 9.   Borrowings and Deposits   126
    Note 10.   Stockholders’ Equity and Earnings Per Share   130
    Note 11.   Commitments, Contingencies and Guarantees   133
    Note 12.   Employee Benefit Plans   140
    Note 13.   Employee Incentive Plans   145
    Note 14.   Income Taxes   150
    Note 15.   Regulatory Requirements   152
    Note 16.   Acquisitions   153
    Note 17.   Discontinued Operations   154
    Note 18.   BlackRock Merger   154
    Note 19.   Subsequent Events   155
    Note 20.   Cash Flow Restatement   155
Supplemental Financial Information (Unaudited)   156
    Quarterly Information   156
    Dividends Per Common Share   157
    Stockholder Information   158
    Stock Performance Graph   158
Other Information (Unaudited)   159
Corporate Information   168
Exhibits, Financial Statement Schedules   169
Cross-Reference Index   170
Signatures   171
Exhibit Index   E-1
 EX-4.5: Nineteenth Supplemental Indenture to the 1983 Senior Indenture
 EX-10.2: Form of Release of rights under Severance Agreements
 EX-10.27: Capital Accumulation Award Plan as Amended
 EX-10.29: Long-Term Incentive Compensation Plan for Managers and Producers, as amended
 EX-10.30: Long-Term Incentive Compensation Plan for executive officers, as amended
 EX-10.32: Employee Stock Compensation Plan as amended
 EX-12: Statement re: computation of ratios
 EX-21: Subsidiaries of ML & Co.
 EX-23.1: Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP
 EX-23.2: Consent of Independent Registered Public Accounting Firm of BlackRock, Inc., Deloitte & Touche LLP
 EX-31.1: Certification of the Chief Executive Officer
 EX-31.2: Certification of the Chief Financial Officer
 EX-32.1: Certification
 EX-32.2: Certification
 EX-99.1: Reconciliation of Non-GAAP Measures
 EX-99.2: Report of Deloitte & Touche LLP
 EX-99.8: Condensed Financial Information

         
Merrill Lynch 2007 Annual Report   page 18    


Table of Contents

Selected Financial Data

 
                                         
    YEAR ENDED LAST FRIDAY IN DECEMBER  
    2007
    2006
    2005
    2004
    2003
 
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)   (52 WEEKS )   (52 WEEKS )   (52 WEEKS )   (53 WEEKS )   (52 WEEKS )
Results of Operations
                                       
Total Revenues
  $ 62,675     $ 69,352     $ 46,848     $ 31,916     $ 27,392  
Less Interest Expense
    51,425       35,571       21,571       10,416       7,844  
                                         
Revenues, Net of Interest Expense
    11,250       33,781       25,277       21,500       19,548  
Non-Interest Expenses
    24,081       23,971       18,516       15,992       14,474  
                                         
Pre-Tax (Loss)/Earnings from Continuing Operations
    (12,831 )     9,810       6,761       5,508       5,074  
Income Tax (Benefit)/Expense
    (4,194 )     2,713       1,946       1,244       1,341  
                                         
                                         
Net (Loss)/Earnings from Continuing Operations
  $ (8,637 )   $ 7,097     $ 4,815     $ 4,264     $ 3,733  
                                         
Pre-Tax Earnings from Discontinued Operations
  $ 1,397     $ 616     $ 470     $ 327     $ 146  
Income Tax Expense
  $ 537     $ 214     $ 169     $ 155     $ 43  
                                         
Net Earnings from Discontinued Operations
  $ 860     $ 402     $ 301     $ 172     $ 103  
                                         
                                         
Net (Loss)/Earnings Applicable to
Common Stockholders(1)
  $ (8,047 )   $ 7,311     $ 5,046     $ 4,395     $ 3,797  
                                         
                                         
Financial Position
                                       
Total Assets
  $ 1,020,050     $ 841,299     $ 681,015     $ 628,098     $ 480,233  
Short-Term Borrowings(2)
    316,545       284,226       221,389       180,058       111,727  
Deposits
    103,987       84,124       80,016       79,746       79,457  
Long-Term Borrowings
    260,973       181,400       132,409       119,513       85,178  
Junior Subordinated Notes
(related to trust preferred securities)
    5,154       3,813       3,092       3,092       3,203  
Total Stockholders’ Equity
  $ 31,932     $ 39,038     $ 35,600     $ 31,370     $ 28,884  
                                         
                                         
Common Share Data
                                       
(in thousands, except per share amounts)
                                       
(Loss)/Earnings Per Share:
                                       
Basic (Loss)/Earnings Per Common Share from Continuing Operations
  $ (10.73 )   $ 7.96     $ 5.32     $ 4.62     $ 4.10  
Basic Earnings Per Common Share from Discontinued Operations
    1.04       0.46       0.34       0.19       0.12  
                                         
Basic (Loss)/Earnings Per Common Share
  $ (9.69 )   $ 8.42     $ 5.66     $ 4.81     $ 4.22  
                                         
                                         
Diluted (Loss)/Earnings Per Common Share from Continuing Operations
  $ (10.73 )   $ 7.17     $ 4.85     $ 4.21     $ 3.77  
Diluted Earnings Per Common Share from Discontinued Operations
    1.04       0.42       0.31       0.17       0.10  
                                         
Diluted (Loss)/Earnings Per Common Share
  $ (9.69 )   $ 7.59     $ 5.16     $ 4.38     $ 3.87  
                                         
                                         
Weighted-Average Shares Outstanding:
                                       
Basic
    830,415       868,095       890,744       912,935       900,711  
Diluted
    830,415       962,962       977,736       1,003,779       980,947  
Shares Outstanding at Year-End
    939,112       867,972       919,201       931,826       949,907  
Book Value Per Share
  $ 29.34     $ 41.35     $ 35.82     $ 32.99     $ 29.96  
Dividends Paid Per Share
  $ 1.40     $ 1.00     $ 0.76     $ 0.64     $ 0.64  
                                         
                                         
Financial Ratios
                                       
Pre-Tax Profit Margin from Continuing Operations
    N/M       29.0 %     26.7 %     25.6 %     26.0 %
Common Dividend Payout Ratio
    N/M       11.9 %     13.4 %     13.3 %     15.2 %
Return on Average Assets
    N/M       0.9 %     0.7 %     0.8 %     0.8 %
Return on Average Common Stockholders’ Equity from Continuing Operations
    N/M       20.1 %     15.0 %     13.8 %     14.4 %
                                         
Other Statistics
                                       
Full-Time Employees:
                                       
U.S.
    48,700       43,700       43,200       40,200       38,200  
Non-U.S.
    15,500       12,500       11,400       10,400       9,900  
                                         
Total(3)
    64,200       56,200       54,600       50,600       48,100  
                                         
                                         
                                         
Financial Advisors
    16,740       15,880       15,160       14,140       13,530  
Client Assets (dollars in billions)
  $ 1,751     $ 1,619     $ 1,458     $ 1,359     $ 1,267  
                                         
                                         
Note: Certain prior period amounts have been reclassified to conform to current period presentation.
N/M = Not Meaningful
(1) Net (loss)/earnings less preferred stock dividends.
(2) Consists of payables under repurchase agreements and securities loaned transactions and short-term borrowings.
(3) Excludes 700, 100, 200, 100 and 200 full-time employees on salary continuation severance at year-end 2007, 2006, 2005, 2004 and 2003 respectively.

         
    page 19   (Bull Graphic)


Table of Contents

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

 
   Forward-Looking Statements and Non-GAAP Financial Measures
We have included certain statements in this report which may be considered forward-looking, including those about management expectations, strategic objectives, growth opportunities, business prospects, anticipated financial results, the impact of off-balance sheet exposures, significant contractual obligations, anticipated results of litigation and regulatory investigations and proceedings, risk management policies and other similar matters. These forward-looking statements represent only Merrill Lynch & Co., Inc.’s (“ML & Co.” and, together with its subsidiaries, “Merrill Lynch”, the “company”, “we”, “our” or “us”) beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond our control, which affect our operations, performance, business strategy and results and could cause our actual results and experience to differ materially from the expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to, actions and initiatives taken by both current and potential competitors and counterparties, general economic conditions, market conditions, the effects of current, pending and future legislation, regulation and regulatory actions, the actions of rating agencies and the other risks and uncertainties detailed in this report. See “Risk Factors that Could Affect Our Business”. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures we may make in future filings of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
 
From time to time, we may also disclose financial information on a non-GAAP basis where management uses this information and believes this information will be valuable to investors in gauging the quality of our financial performance, identifying trends in our results and providing more meaningful period-to-period comparisons. For a reconciliation of non-GAAP measures presented throughout this report see Exhibit 99.1 filed with our 2007 Form 10-K.
 
   Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that we file electronically with the SEC. The SEC’s internet site is www.sec.gov.
 
Our internet address is www.ml.com, and the investor relations section of our website can be accessed directly at www.ir.ml.com. We make available, free of charge, our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports are available through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. We have also posted on our website corporate governance materials including our Guidelines for Business Conduct, Code of Ethics for Financial Professionals, Director Independence Standards, Corporate Governance Guidelines, Related Party Transactions Policy and charters for the committees of our Board of Directors. In addition, our website (through a link to the SEC’s website) includes information on purchases and sales of our equity securities by our executive officers and directors, as well as disclosures relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time.
 
We will post on our website amendments to our Guidelines for Business Conduct and Code of Ethics for Financial Professionals and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange. You can obtain printed copies of these documents, free of charge, upon written request to Judith A. Witterschein, Corporate Secretary, Merrill Lynch & Co., Inc., 222 Broadway, 17th Floor, New York, NY 10038 or by email at corporate ­ ­secretary@ml.com. The information on our website is not incorporated by reference into this Report.
 
   Introduction
Merrill Lynch was formed in 1914 and became a publicly traded company on June 23, 1971. In 1973, we created the holding company, ML & Co., a Delaware corporation that, through its subsidiaries, is one of the world’s leading capital markets, advisory and wealth management companies with offices in 40 countries and territories and total client assets of almost $2 trillion at December 28, 2007. As an investment bank, we are a leading global trader and underwriter of securities and derivatives across a broad range of asset classes, and we serve as a strategic advisor to corporations, governments, institutions and individuals worldwide. In addition, we own a 45% voting interest and approximately half of the economic interest of BlackRock, Inc. (“BlackRock”), one of the world’s largest publicly traded investment management companies with approximately $1.4 trillion in assets under management at December 28, 2007.
 
Since the fourth quarter of 2006, our business segment reporting reflects the management reporting lines established after the merger of our Merrill Lynch Investment Managers (“MLIM”) business with BlackRock on September 29, 2006 (the “BlackRock merger”).

         
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Prior to the fourth quarter of 2006, we reported our business activities in three business segments: Global Markets and Investment Banking (“GMI”), Global Private Client (“GPC”), and MLIM. Effective with the BlackRock merger, MLIM ceased to exist as a separate business segment. As a result, a new business segment, Global Wealth Management (“GWM”), was created, consisting of GPC and Global Investment Management (“GIM”). GWM and GMI are now our business segments. We have restated prior period segment information to conform to the current period presentation and, as a result, are presenting GWM as if it had existed for these prior periods. See Note 2 to the Consolidated Financial Statements for further information on segments, and see Note 18 to the Consolidated Financial Statements for additional information on the BlackRock merger.
 
The following is a description of our current business segments:
 
             
      GMI     GWM
Clients
    Corporations, financial institutions, institutional
investors, and governments
    Individuals, small- to mid-size businesses, and
employee benefit plans
             
Products and businesses     Global Markets     Global Private Client
   
• Facilitates client transactions and makes markets in securities, derivatives, currencies, commodities and other financial instruments to satisfy client demands
• Provides clients with financing, securities clearing, settlement, and custody services
• Engages in principal and private equity investing and certain proprietary trading activities

Investment Banking
• Provides a wide range of securities origination services for issuer clients, including underwriting and placement of public and private equity, debt and related securities, as well as lending and other financing activities for clients globally
• Advises clients on strategic issues, valuation,
mergers, acquisitions and restructurings
   
• Most of our services are delivered by our Financial Advisors (“FAs”)
• Commission and fee-based investment accounts
• Banking, cash management, and credit services, including consumer and small business lending and Visa® cards
• Trust and generational planning
• Retirement services
• Insurance products

Global Investment Management
• Creates and manages hedge funds and other alternative investment products for GPC clients
• Includes net earnings from our ownership positions in other investment management companies, including our investment in BlackRock
           
Strategic
priorities
   
• Disciplined expansion globally
• Optimize amount of capital allocated to businesses
• Continue to invest in technology to enhance productivity and efficiency
• Strengthen linkages with our GWM business
• Enhance risk management capabilities
   
• Continued growth in client assets
• Hiring of additional FAs
• Focus on client segmentation and increased annuitization of revenues through fee-based products
• Diversify revenues through adding products and services
• Continue to invest in technology to enhance productivity and efficiency
• Disciplined expansion globally
             
 
We also provide a variety of research services on a global basis through Global Research. These services are at the core of the value proposition we offer to institutional and individual investor clients and are an integral component of the product offerings to GMI and GWM. This group distributes research focusing on four main disciplines globally: fundamental equity research, fixed income and equity-linked research, economics and foreign exchange research and investment strategy research. We consistently rank among the leading research providers in the industry, and our analysts and other professionals cover approximately 3,600 companies.
 
We are a Consolidated Supervised Entity (“CSE”) and subject to group-wide supervision by the SEC. As a CSE, we compute allowable capital and allowances and permit the SEC to examine the books and records of the holding company and of any subsidiary that does not have a principal regulator. We have also adopted SEC reporting, record-keeping, and notification requirements. We were in compliance with applicable CSE standards as of December 28, 2007. In respect of the European Union (“EU”) Financial Conglomerates (or “Financial Groups”) Directive, the U.K. Financial Services Authority (“FSA”) has determined that the SEC undertakes equivalent consolidated supervision for Merrill Lynch.

         
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   Executive Overview
 
   Company Results
We reported a net loss from continuing operations for 2007 of $8.6 billion, or $10.73 loss per diluted share, compared to net earnings from continuing operations of $7.1 billion, or $7.17 per diluted share for 2006. Net revenues for 2007 were $11.3 billion, down 67% from $33.8 billion in 2006, while the 2007 pre-tax loss from continuing operations was $12.8 billion compared to pre-tax earnings from continuing operations of $9.8 billion for 2006.
 
Our substantially reduced performance during the year was primarily driven by significant declines in Fixed Income, Currencies & Commodities (“FICC”) net revenues for the second half of the year, which more than offset record full year net revenues in Equity Markets, Investment Banking and GPC, and record first half net revenues from FICC. During the second half of 2007, FICC net revenues were materially impacted by a weaker business environment which resulted in full year net write-downs that included approximately $23.2 billion related to U.S. collateralized debt obligations (“CDOs”) comprised of asset-backed securities (“ABS CDOs”), U.S. sub-prime residential mortgages and securities, and credit valuation adjustments related to hedges with financial guarantors on U.S. ABS CDOs.
 
   Global Markets and Investment Banking (GMI)
GMI recorded negative net revenues of $2.7 billion and a pre-tax loss of $16.3 billion for 2007, primarily due to net losses in FICC, partially offset by record net revenues from Equity Markets and Investment Banking. GMI’s net revenues also included gains of approximately $1.9 billion (approximately $1.2 billion in FICC and $700 million in Equity Markets) due to the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities. Net revenues from GMI’s three major business lines were as follows:
 
FICC net revenues were negative $15.9 billion for 2007, impacted primarily by net write-downs of $16.7 billion related to U.S. ABS CDOs, write-downs of $3.2 billion related to U.S. sub-prime residential mortgage exposures, credit valuation adjustments of $2.6 billion related to our hedges with financial guarantors on U.S. ABS CDOs and write-downs of approximately $700 million related to sub-prime related securities in our U.S. banks investment securities portfolio. To a lesser extent, FICC was impacted by write-downs related to other residential mortgage and commercial real estate exposures and liabilities recorded for probable losses of non-investment grade lending commitments. In addition, the business environment for FICC became more challenging towards the end of 2007, and resulted in substantially reduced client flows and decreased trading opportunities.
 
Equity Markets net revenues for 2007 were a record $8.3 billion, up 23% from 2006, driven by strong trading volumes in our cash equities platform where we achieved a market leading position in U.S. and London Stock Exchange listed stocks. Full year results were also driven by strength in equity-linked trading and the financing and services businesses. These increases in net revenues for the year more than offset a year-over-year decline in net revenues from our private equity business.
 
Investment Banking net revenues for 2007 were a record $4.9 billion, up 22% from the prior year. This reflects substantial growth in net revenues for both our equity origination and strategic advisory businesses, which increased 34% and 58% respectively, and the momentum in our global origination franchise, as evidenced by our role as sole advisor to the consortium including Royal Bank of Scotland, Fortis and Banco Santander on their landmark acquisition of ABN AMRO. These increases in net revenues for equity origination and strategic advisory services were partially offset by a decline of 9% in debt origination revenues which were impacted by the difficult credit markets.
 
   Global Wealth Management (GWM)
GWM continued to generate robust net revenues and pre-tax earnings in 2007, reflecting continued strong growth in GPC, which set numerous records, and GIM, which includes earnings from our investment in BlackRock. For 2007, GWM’s net revenues increased 18% to $14.0 billion, driven by both GPC and GIM. Pre-tax earnings increased 59% from the prior year to $3.6 billion, and GWM’s 2007 pre-tax profit margin was 25.9%, up 6.6 percentage points from 19.3% in the prior-year. Net revenues from GWM’s major business lines were as follows:
 
GPC net revenues for 2007 were a record $12.9 billion, up 14% year-over-year, with revenue growth across all major product lines. Fee-based revenues rose significantly reflecting higher market values and strong flows into fee-based products, and transaction and origination revenues grew strongly driven by higher client transaction volumes, particularly outside the United States, and growth in origination activity across all products. Net interest profit rose as well, reflecting increased revenues from U.S. bank deposits and the results of First Republic Bank (“First Republic”), which we acquired on September 21, 2007.
 
GIM net revenues for 2007 were $1.1 billion, up 107% from 2006, driven by the inclusion of a full year’s revenue from the investment in BlackRock, as well as strong growth in GIM’s alternative investments business and strategic holdings in investment management companies.

         
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GWM Key Metrics
2007 was a particularly strong year for GWM in terms of financial performance, growth in client assets including net new money, and the recruitment, training and retention of FAs. Key statistics related to client assets, net new money and FAs are as follows:
 
             
    FOR THE YEAR
  FOR THE YEAR
    ENDED DEC. 28,
  ENDED DEC. 29,
(DOLLARS IN BILLIONS)   2007   2006
Client Assets
           
U.S.
  $ 1,586   $ 1,483
Non-U.S.
    165     136
             
Total Client Assets
    1,751     1,619
Assets in Annuitized-Revenue Products
    655     611
             
Net New Money
           
All Client Accounts(1)
  $ 80   $ 60
Annuitized-Revenue Products(1)(2)
    38     48
             
Financial Advisors
    16,740     15,880
             
             
Note: Certain prior period amounts have been reclassified to conform to the current period presentation.
(1) Net new money excludes flows associated with the Institutional Advisory Division which serves certain small- and middle-market companies, as well as net inflows at BlackRock from distribution channels other than Merrill Lynch.
(2) Includes both net new client assets into annuitized-revenue products, as well as existing client assets transferred into annuitized-revenue products.
 
   Capital Transactions
As a result of the decrease in our equity capital due to the large write-downs we incurred in 2007, one of our key priorities towards the end of the year and continuing into the start of 2008 has been to focus on capital management which has led to the following stock issuances:
 
•  Issuance of 80 million shares of common stock for $3.8 billion during the fourth quarter of 2007 in connection with equity investments from Temasek Capital (Private) Limited (“Temasek”) and Davis Selected Advisors LP (“Davis”);
 
•  Issuance of 49.2 million shares of common stock for $2.4 billion during the first quarter of 2008 in connection with equity investments from Temasek and assignees; and
 
•  Issuance of $6.6 billion of mandatory convertible preferred stock (convertible into a maximum of 126 million shares of common stock) during the first quarter of 2008 to long-term investors including the Korea Investment Corporation, Kuwait Investment Authority and Mizuho Corporate Bank.
 
   Strategic Transactions
During 2007 we executed the following strategic transactions:
 
Merrill Lynch Insurance Group
On August 13, 2007, we announced a strategic business relationship with AEGON, N.V. (“AEGON”) in the areas of insurance and investment products. As part of this relationship, we agreed to sell Merrill Lynch Life Insurance Company and ML Life Insurance Company of New York (together “Merrill Lynch Insurance Group” or “MLIG”) to AEGON for $1.3 billion. We will continue to serve the insurance needs of our clients through our core distribution and advisory capabilities. The sale of MLIG was completed in the fourth quarter of 2007 and resulted in an after-tax gain of $316 million. The gain along with the results of MLIG have been reported within discontinued operations for all periods presented. We previously reported the results of MLIG in the GWM business segment. Refer to Note 17 to the Consolidated Financial Statements for additional information.
 
First Republic Bank
On September 21, 2007, we acquired all of the outstanding common shares of First Republic in exchange for a combination of cash and stock for a total transaction value of $1.8 billion. First Republic provides personalized, relationship-based banking services, including private banking, private business banking, real estate lending, trust, brokerage and investment management. The results of operations of First Republic have been included in GWM since the transaction closed. Refer to Note 16 to the Consolidated Financial Statements for additional information.
 
Merrill Lynch Capital
On December 24, 2007, we announced that we had reached an agreement with GE Capital to sell Merrill Lynch Capital, a wholly-owned middle-market commercial finance business. The sale includes substantially all of Merrill Lynch Capital’s operations, including its commercial real estate division. This transaction closed on February 4, 2008. We have included the results of Merrill Lynch Capital within discontinued operations for all periods presented. We previously reported results of Merrill Lynch Capital in the GMI business segment. Refer to Note 17 to the Consolidated Financial Statements for additional information.
 
As a result of the MLIG and Merrill Lynch Capital transactions we will be able to more effectively reallocate capital among our businesses.

         
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   Outlook
The challenging market conditions at the end of 2007 have continued into 2008, driven largely by significant weakness in the U.S. and European credit markets, which we expect to persist in the near term with continued asset repricing and valuation pressures across multiple asset classes. This continued weakness may negatively impact the valuation of our net exposures to U.S. super senior ABS CDOs, sub-prime related assets and other residential and commercial real estate related loans and securities, which would result in additional write-downs. Certain of these assets are held by our U.S. banks in their investment portfolio and are classified as available-for-sale securities. Current market conditions may also result in additional write-downs to the carrying amount of our investment portfolio. Additionally, negative economic conditions have begun to adversely impact other consumer lending asset classes.
 
Specifically, we ended 2007 with sizeable long and short exposures to U.S. ABS CDOs as well as exposure to various residential real estate assets including U.S. sub-prime, U.S. Alt A, U.S. prime and non-U.S. residential loans and securities. See the U.S. ABS CDO and Other Mortgage-Related Activities section on pages 34 to 38 for descriptions and additional information on these net exposures.
 
To economically hedge certain of our ABS CDO and U.S. sub-prime mortgage exposures, we entered into credit default swaps with various counterparties, including financial guarantors. At December 28, 2007, our short exposure from credit default swaps with financial guarantors to economically hedge certain U.S. super senior ABS CDOs was $13.8 billion, which represented credit default swaps with a notional amount of $19.9 billion that have been adjusted for mark-to-market gains of $6.1 billion. The fair value of these credit default swaps at December 28, 2007 was $3.5 billion, after taking into account a $2.6 billion credit valuation adjustment related to certain financial guarantors. We also have credit derivatives with financial guarantors across other referenced assets. The fair value of these credit derivatives at December 28, 2007 was $2.0 billion, after taking into account a $0.5 billion credit valuation adjustment.
 
Subsequent to year-end, market conditions deteriorated and have led to negative rating agency actions for certain financial guarantors. We continue to monitor industry and company specific developments. Further credit deterioration of the underlying assets hedged with the financial guarantors and/or the financial guarantors themselves could have an adverse impact on our future financial performance.
 
Conditions in both the Leveraged Finance and Commercial Real Estate markets, which began to deteriorate in the middle of 2007, have continued to experience significant spread widening and price declines since the beginning of 2008. While difficult to predict, future market conditions will likely remain challenged due to increased volatility, uncertain economic conditions, overhang of the supply of certain large transactions that have not yet been successfully syndicated, and reduced demand from some market participants. Merrill Lynch continues to aggressively focus on reducing its aggregate exposures, monitoring the underlying fundamentals of these positions and exercising prudent underwriting discipline with respect to any new financing commitments.
 
Overall, with these challenging credit conditions and declines in most global equity indices in 2008, volatility in the financial markets remains high, and capital markets uncertainty has increased. While these factors may negatively impact investment banking activity and GWM asset values in the near term, we expect certain FICC and Equity Markets businesses to benefit from increased client trading activity and proprietary trading opportunities. In addition, despite this near-term uncertainty, client interest in various strategic and financial transactions remains active globally, and investment banking pipelines continue to be at healthy levels.
 
For the long-term, we continue to be optimistic about the outlook for our businesses. We expect global GDP growth to remain strong, particularly in emerging markets such as Brazil, China, India and the Middle East, which we expect to offset potentially slowing growth in the U.S. and certain other mature economies. Given our regional and product diversification, we expect continued growth of the global capital markets and ongoing wealth creation around the world to provide a favorable environment for our businesses over the long-term.
 
   Risk Factors that Could Affect Our Business
In the course of conducting our business operations, we are exposed to a variety of risks that are inherent to the financial services industry. A summary of some of the significant risks that could affect our financial condition and results of operations is included below. Some of these risks are managed in accordance with established risk management policies and procedures, most of which are described in the Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
 
   Market Risk
Our business may be adversely impacted by global market and economic conditions that may cause fluctuations in interest rates, exchange rates, equity and commodity prices and credit spreads. We are exposed to potential changes in the value of financial instruments caused by fluctuations in interest rates, currency exchange rates, equity and commodity prices, credit spreads, and/or other risks. These fluctuations may result from changes in economic conditions, investor sentiment, monetary and fiscal policies, the liquidity of global markets, availability and cost of capital, the actions of credit rating agencies, international and regional political events, and acts of war or terrorism. We have large proprietary trading and investment positions, which include positions in fixed income, currency, commodities and equity securities, as well as in real estate, private equity and other investments. We have incurred losses and may incur additional losses as a result of increased market volatility or decreased market liquidity, as these fluctuations may adversely

         
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impact the valuation of our trading and investment positions. Conversely, a decline in volatility may adversely affect results in our trading businesses, which depend on market volatility to create client and proprietary trading opportunities.
 
We may incur additional material losses in future periods due to write-downs in the value of financial instruments. We recorded significant net write-downs in the 2007 fiscal year, primarily related to U.S. ABS CDOs, sub-prime residential mortgages, and credit valuation adjustments related to hedging transactions with financial guarantors on U.S. ABS CDOs. The markets for U.S. ABS CDOs and other sub-prime residential mortgage exposures remain extremely illiquid in early 2008 and as a result, valuation of these exposures is complex and involves a comprehensive process including the use of quantitative modeling and management judgment. Valuation of these exposures will also continue to be impacted by external market factors including default rates, a decline in the value of the underlying property, such as residential or commercial real estate, rating agency actions, the prices at which observable market transactions occur and the financial strength of counterparties, such as financial guarantors, with whom we have economically hedged some of our exposure to these assets. Our ability to mitigate our risk by selling or hedging our exposures is also limited by the market environment.
 
Our business has been and may be adversely impacted by significant holdings of financial assets or significant loans or commitments to extend loans. In the course of our business, we often commit substantial amounts of capital to certain types of businesses or asset classes, including our trading, structured credit, residential and commercial real estate-related activities, investment banking, private equity and leveraged finance businesses. This commitment of capital exposes us to a number of risks, including market risk, in the case of our holdings of concentrated or illiquid positions in a particular asset class as part of our trading, structured credit, residential and commercial real estate-related activities, and credit risk, in the case of our leveraged lending businesses. Any decline in the value of such assets may reduce our revenues or result in losses.
 
   Credit Risk
Our business may be adversely impacted by an increase in our credit exposure related to trading, lending, and other business activities. We are exposed to potential credit-related losses that can occur as a result of an individual, counterparty or issuer being unable or unwilling to honor its contractual obligations. These credit exposures exist within lending relationships, commitments, letters of credit, derivatives, including transactions we may enter into to hedge our exposure to various assets, foreign exchange and other transactions. These exposures may arise, for example, from a decline in the financial condition of a counterparty, from entering into swap or other derivative contracts under which counterparties have obligations to make payments to us, from a decrease in the value of securities of third parties that we hold as collateral, or from extending credit to clients through loans or other arrangements. As our credit exposure increases, it could have an adverse effect on our business and profitability if material unexpected credit losses occur.
 
   Risks Related to our Commodities Business
We are exposed to environmental, reputational and regulatory risk as a result of our commodities related activities. Through our commodities business, we enter into exchange-traded contracts, financially settled over-the-counter (“OTC”) derivatives, contracts for physical delivery and contracts providing for the transportation, transmission and/or storage rights on or in vessels, barges, pipelines, transmission lines or storage facilities. Contracts relating to physical ownership, delivery and/or related activities can expose us to numerous risks, including performance, environmental and reputational risks. For example, we may incur civil or criminal liability under certain environmental laws and our business and reputation may be adversely affected. In addition, regulatory authorities have recently intensified scrutiny of certain energy markets, which has resulted in increased regulatory and legal enforcement, litigation and remedial proceedings involving companies engaged in the activities in which we are engaged.
 
   International Risk
We have an increasing international presence and as a result, we are increasingly subject to a number of risks in various jurisdictions. In the past years, we have expanded our international operations and expect to continue to do so in the future. This expansion, however, gives us a greater exposure to a number of risks, including economic, market, reputational, litigation and regulatory risks. For example, in many emerging markets, the regulatory regime governing financial services firms is still developing, and the regulatory authorities may adopt restrictive regulation or policies, such as exchange, price or capital controls, that could have an adverse effect on our businesses. In addition, in virtually all markets, we are competing with a number of established competitors that in some cases may have significant competitive advantages over us in those markets.
 
   Liquidity Risk
Our business and financial condition may be adversely impacted by an inability to borrow funds or sell assets to meet our obligations. We are exposed to liquidity risk, which is the potential inability to repay short-term borrowings with new borrowings or liquid assets that can be quickly converted into cash while meeting other obligations and continuing to operate as a going concern. Our liquidity may be impaired due to circumstances that we may be unable to control, such as general market disruptions, disruptions in the markets for any specific class of assets, including any disruption that would require us to honor commitments to provide liquidity to certain off-balance sheet vehicles, or an operational problem that affects our trading clients or ourselves. Our ability to sell assets may

         
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also be impaired if other market participants are seeking to sell similar assets at the same time. Our inability to borrow funds or sell assets to meet obligations, a negative change in our credit ratings that would have an adverse effect on our ability to borrow funds, increases in the amount of collateral required by counterparties, or regulatory capital restrictions imposed on the free flows of funds between us and our subsidiaries may have a negative effect on our business and financial condition.
 
   Operational Risk
We may incur losses due to the failure of people, internal processes and systems or from external events. Our business may be adversely impacted by operational failures or from unfavorable external events. Such operational risks may include exposure to theft and fraud, improper business practices, client suitability and servicing risks, unauthorized transactions, product complexity and pricing risk or from improper recording, evaluating or accounting for transactions. We could suffer financial loss, disruption of our business, liability to clients, regulatory intervention or reputational damage from such events, which would affect our business and financial condition.
 
We may incur losses as a result of an inability to effectively evaluate or mitigate the risks in our businesses. Our businesses expose us to a wide and increasing number of risks, including market risk, credit risk, liquidity risk, operational risk and litigation risk. For each of these and other risks that we face, we attempt to formulate and refine a framework to identify and address such risk. We have in the past and may in the future incur losses as a result of a failure to correctly evaluate or effectively address the risks in our business activities.
 
   Litigation Risk
Legal proceedings could adversely affect our operating results for a particular period and impact our credit ratings. We have been named as a defendant in various legal actions, including arbitrations, class actions, and other litigation arising in connection with our activities as a global diversified financial services institution. Some of the legal actions against us include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Any prolonged decline in securities prices may lead to increased actions against many firms, including Merrill Lynch, and may lead to increased legal expenses and potential liability. In some cases, the issuers who would otherwise be the primary defendants are bankrupt or otherwise in financial distress. Given the number of these matters, some are likely to result in adverse judgments, penalties, injunctions, fines, or other relief. We are also involved in investigations and/or proceedings by governmental and self-regulatory agencies.
 
We may explore potential settlements before a case is taken through trial because of uncertainty, risks, and costs inherent in the litigation process. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies (“SFAS No. 5”), we will accrue a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many lawsuits, arbitrations and investigations, including almost all of the class action lawsuits disclosed in “Other Information (Unaudited) — Legal Proceedings”, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close to resolution, in which case no accrual is made until that time. In view of the inherent difficulty of predicting the outcome of such matters, particularly in matters in which claimants seek substantial or indeterminate damages, we cannot predict what the eventual loss or range of loss related to such matters will be. Potential losses may be material to our operating results for any particular period and may impact our credit ratings.
 
   Regulatory and Legislative Risks
Many of our businesses are highly regulated and could be impacted, and in some instances adversely impacted, by regulatory and legislative initiatives around the world. Our businesses may be affected by various U.S. and non-U.S. legislative bodies and regulatory and exchange authorities, such as federal and state securities and bank regulators including the SEC, the Federal Deposit Insurance Corporation (“FDIC”), the Office of Thrift Supervision (“OTS”), and the Utah Department of Financial Institutions; self-regulatory organizations including the Financial Industry Regulatory Authority (“FINRA”), the Commodity Futures Trading Commission (“CFTC”), the United Kingdom Financial Services Authority (“FSA”), the Japan Financial Services Agency (“JFSA”), and the Irish Financial Regulator (“IFR”); and industry participants that continue to review and, in many cases, adopt changes to their established rules and policies. New laws or regulations or changes in the enforcement of existing laws and regulations may also adversely affect our businesses. As we expand globally we will encounter new laws, regulations and requirements that could impact our ability to operate in new local markets.
 
   Competitive Environment
Competitive pressures in the financial services industry could adversely affect our business and results of operations. We compete globally for clients on the basis of price, the range of products that we offer, the quality of our services, our financial resources, and product and service innovation. The financial services industry continues to be affected by an intensely competitive environment, as demonstrated by the introduction of new technology platforms, consolidation through mergers, increased competition from new and established industry participants and diminishing margins in many mature products and services. We compete with U.S. and non-U.S. commercial banks and other broker-dealers in brokerage, underwriting, trading, financing and advisory businesses. For example, the financial services industry in general, including us, has experienced intense price competition in brokerage, as the ability to

         
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execute trades electronically, through the internet and through other alternative trading systems, has pressured trading commissions and spreads. Many of our non-U.S. competitors may have competitive advantages in their home markets. In addition, our business is substantially dependent on our continuing ability to compete effectively to attract and retain qualified employees, including successful FAs, investment bankers, trading and risk management professionals and other revenue-producing or support personnel.
 
For further information on trading risks refer to Note 3 to the Consolidated Financial Statements.
 
   Critical Accounting Policies and Estimates
 
   Use of Estimates
In presenting the Consolidated Financial Statements, management makes estimates regarding:
 
•  Valuations of assets and liabilities requiring fair value estimates;
 
•  The outcome of litigation;
 
•  The realization of deferred taxes and the recognition and measurement of uncertain tax positions;
 
•  Assumptions and cash flow projections used in determining whether variable interest entities (“VIEs”) should be consolidated and the determination of the qualifying status of qualified special purpose entities (“QSPEs”);
 
•  The carrying amount of goodwill and other intangible assets;
 
•  The amortization period of intangible assets with definite lives;
 
•  Valuation of share-based payment compensation arrangements; and
 
•  Other matters that affect the reported amounts and disclosure of contingencies in the financial statements.
 
Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on the Consolidated Financial Statements, and it is possible that such changes could occur in the near term. For more information regarding the specific methodologies used in determining estimates, refer to Use of Estimates in Note 1 to the Consolidated Financial Statements.
 
   Valuation of Financial Instruments
Proper valuation of financial instruments is a critical component of our financial statement preparation. We account for a significant portion of our financial instruments at fair value or consider fair value in our measurement. We account for certain financial assets and liabilities at fair value under various accounting literature, including SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 159, Fair Value Option for Certain Financial Assets and Liabilities (“SFAS No. 159”). We also account for certain assets at fair value under applicable industry guidance, namely broker-dealer and investment company accounting guidance.
 
In presenting the Consolidated Financial Statements, management makes estimates regarding valuations of assets and liabilities requiring fair value measurements. These assets and liabilities include:
 
•  Trading inventory and investment securities;
 
•  Private equity and principal investments;
 
•  Certain receivables under resale agreements and payables under repurchase agreements;
 
•  Loans and allowance for loan losses and liabilities recorded for unrealized losses on unfunded commitments; and
 
•  Certain long-term borrowings, primarily structured debt.
 
See further discussion in Note 1 to the Consolidated Financial Statements.
 
We early adopted the provisions of SFAS No. 157 Fair Value Measurements (“SFAS No. 157”) in the first quarter of 2007. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date (i.e., the exit price). An exit price notion does not assume that the transaction price is the same as the exit price and thus permits the recognition of inception gains and losses on a transaction in certain circumstances. An exit price notion requires the valuation to consider what a marketplace participant would pay to buy an asset or receive to assume a liability. Therefore, we must rely upon observable market data before we can utilize internally derived valuations.
 
Fair values for exchange-traded securities and certain exchange-traded derivatives, principally certain options contracts, are based on quoted market prices. Fair values for OTC derivatives, principally forwards, options, and swaps, represent amounts estimated to be received from or paid to a market participant in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows and directly observed prices from exchange-traded derivatives, other OTC

         
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trades, or external pricing services and other inputs such as quoted interest and currency indices, while taking into account the counterparty’s credit rating, or our own credit rating as appropriate.
 
New and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the Consolidated Financial Statements. For example, on long-dated and illiquid contracts we apply extrapolation methods to observed market data in order to estimate inputs and assumptions that are not directly observable. This enables us to mark to fair value all positions consistently when only a subset of prices is directly observable. Values for OTC derivatives are verified using observed information about the costs of hedging the risk and other trades in the market. As the markets for these products develop, we continually refine our pricing models to correlate more closely to the market price of these instruments. Obtaining the fair value for OTC derivative contracts requires the use of management judgment and estimates. In addition, during periods of market illiquidity, the valuation of certain cash products can also require significant judgment and the use of estimates by management. Examples of specific instruments and inputs that require significant judgment include:
 
Asset-Backed Securities Valuation
In the most liquid markets, readily available or observable prices are used in valuing asset backed securities. In less liquid markets, such as those that we have encountered in the second half of 2007, the lack of these prices necessitates the use of other available information and modeling techniques to approximate the fair value for some of these securities.
 
For certain classes of asset-backed securities where lack of observable prices is most severe, we employ a fundamental cashflow valuation approach. To determine fair value for these instruments, we employ various econometric techniques, coupled with collateral performance analysis, and review of market comparables, if any. We then project collateral expected losses, leading to deal-specific discounting of cash flows at market levels. More specifically, the valuation for our U.S. ABS CDO super senior securities is based on cash flow analysis including cumulative loss assumptions. These assumptions are derived from multiple inputs including mortgage remittance reports, housing prices and other market data. Relevant ABX indices are also analyzed as part of the overall valuation process.
 
Correlation
We enter into a number of transactions where the performance is wholly or partly dependent on the relative performance of two or more assets. In these transactions, referred to as correlation trades, correlation between the assets can be a significant factor in the valuation. Examples of this type of transaction include: equity or foreign exchange baskets, constant maturity swap spreads (i.e., options where the performance is determined based upon the fluctuations between two benchmark interest rates), and commodity spread trades. Many correlations are available through external pricing services. Where external pricing information is not available, management uses estimates based on historical data, calibrated to more liquid market information. Unobservable credit correlation, such as that influencing the valuation of complex structured CDOs, is calibrated using a proxy approach (e.g., using implied correlation from traded credit index tranches as a proxy for calibrating correlation for a basket of single-name corporate investment grade credits that are infrequently traded).
 
Volatility
We hold derivative positions whose values are dependent on volatilities for which market observable values are not available. These volatilities correspond to options with long-dated expiration dates, strikes significantly in or out of the money, and/or in the case of interest rate underlyings, a large tenor (i.e., an underlying interest rate reference that itself is long-dated). We use model-based extrapolation, proxy techniques, or historical analysis, to derive the unobservable volatility. These methods are selected based on available market information and are used across all asset classes. Volatility estimation can have a significant impact on valuations.
 
Prior to adoption of SFAS No. 157, we followed the provisions of EITF 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (“EITF 02-3”). Under EITF 02-3, recognition of day one gains and losses on derivative transactions was prohibited when model inputs that significantly impacted valuation were not observable. Day one gains and losses deferred at inception under EITF 02-3 were recognized at the earlier of when the valuation of such derivative became observable or at the termination of the contract. SFAS No. 157 nullifies this guidance in EITF 02-3. Although this guidance in EITF 02-3 has been nullified, the recognition of significant inception gains and losses that incorporate unobservable inputs are reviewed by management to ensure such gains and losses are derived from observable inputs and/or incorporate reasonable assumptions about the unobservable component, such as implied bid-offer adjustments.
 
Valuation Adjustments
Certain financial instruments recorded at fair value are initially measured using mid-market prices which results in gross long and short positions marked-to-market at the same pricing level prior to the application of position netting. The resulting net positions are then adjusted to fair value representing the exit price as defined in SFAS No. 157. The significant adjustments include liquidity and counterparty credit risk.

         
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Liquidity
We make adjustments to bring a position from a mid-market to a bid or offer price, depending upon the net open position. We value net long positions at bid prices and net short positions at offer prices. These adjustments are based upon either observable or implied bid-offer prices.
 
Counterparty Credit Risk
In determining fair value, we consider both the credit risk of our counterparties, as well as our own creditworthiness. We attempt to mitigate credit risk to third parties by entering into netting and collateral arrangements. Net exposure is then measured with consideration of a counterparty’s creditworthiness and is incorporated into the fair value of the respective instruments. We generally base the calculation of the credit risk adjustment for derivatives upon observable market credit spreads.
 
SFAS No. 157 also requires that we consider our own creditworthiness when determining the fair value of an instrument. The approach to measuring the impact of our credit risk on an instrument is done in the same manner as for third party credit risk. The impact of our credit risk is incorporated into the fair valuation, even when credit risk is not readily observable in the pricing of an instrument, such as in OTC derivatives contracts.
 
In accordance with SFAS No. 157, we have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
 
Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
 
Level 1
Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access (examples include active exchange-traded equity securities, exchange traded derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations).
 
Level 2
Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
 
  a)  Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
 
  b)  Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
 
  c)  Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives including interest rate and currency swaps); and
 
  d)  Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage related assets, including loans, securities and derivatives).
 
 
Level 3
Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage related assets (including loans, securities and derivatives), and long-dated or complex derivatives including certain equity derivatives and long-dated options on gas and power).
 
See Note 3 to the Consolidated Financial Statements for additional information.
 
Valuation controls
Given the prevalence of fair value measurement in our financial statements, the control functions related to the fair valuation process are a critical component of our business operations. Prices and model inputs provided by our trading units are verified with external pricing sources to ensure that the use of observable market data is used whenever possible. Similarly, valuation models created by our trading units are independently verified and tested. These control functions are independent of the trading units and include Business Unit Finance, the Product Valuation Group and Global Risk Management.

         
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   Litigation
We have been named as a defendant in various legal actions, including arbitrations, class actions, and other litigation arising in connection with our activities as a global diversified financial services institution. We are also involved in investigations and/or proceedings by governmental and self-regulatory agencies. In accordance with SFAS No. 5, we will accrue a liability when it is probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. In many lawsuits and arbitrations, including class action lawsuits, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no accrual is made until that time. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, we cannot predict or estimate what the eventual loss or range of loss related to such matters will be. See Note 11 to the Consolidated Financial Statements and Other Information — Legal Proceedings for further information.
 
   Variable Interest Entities and Qualified Special Purpose Entities
In the normal course of business, we enter into a variety of transactions with VIEs. The applicable accounting guidance requires us to perform a qualitative and/or quantitative analysis of each new VIE at inception to determine whether we must consolidate the VIE. In performing this analysis, we make assumptions regarding future performance of assets held by the VIE, taking into account estimates of credit risk, estimates of the fair value of assets, timing of cash flows, and other significant factors. Although a VIE’s actual results may differ from projected outcomes, a revised consolidation analysis is not required subsequent to the initial assessment unless a reconsideration event occurs. If a VIE meets the conditions to be considered a QSPE, it is typically not required to be consolidated by us. A QSPE is a passive entity whose activities must be significantly limited. A servicer of the assets held by a QSPE may have discretion in restructuring or working out assets held by the QSPE, as long as that discretion is significantly limited and the parameters of that discretion are fully described in the legal documents that established the QSPE. Determining whether the activities of a QSPE and its servicer meet these conditions requires management judgment.
 
   Income Taxes
Tax laws are complex and subject to different interpretations by us and various taxing authorities. We regularly assess the likelihood of assessments in each of the taxing jurisdictions by making judgments and interpretations about the application of these complex tax laws and estimating the impact to our financial statements.
 
We are under examination by the Internal Revenue Service (“IRS”) and other tax authorities in countries including Japan and the United Kingdom, and states in which we have significant business operations, such as New York. The tax years under examination vary by jurisdiction. The IRS audits are in progress for the tax years 2004–2006. Japan tax authorities have recently commenced the audit for the fiscal tax years March 31, 2004 through March 31, 2007. In the United Kingdom, the audit for the tax year 2005 is in progress. The Canadian tax authorities have commenced the audit of the tax years 2004–2005. New York State and New York City audits are in progress for the years 2002–2006. Also, we paid an assessment to Japan in 2005 for the fiscal tax years April 1, 1998 through March 31, 2003, in relation to the taxation of income that was originally reported in other jurisdictions. During the third quarter of 2005, we started the process of obtaining clarification from international tax authorities on the appropriate allocation of income among multiple jurisdictions to prevent double taxation. See Note 14 to the Consolidated Financial Statements for a description of tax years that remain subject to examination by major tax jurisdiction.
 
We filed briefs with the U.S. Tax Court in 2005 with respect to a tax case, which had been remanded for further proceedings in accordance with a 2004 opinion of the U.S. Court of Appeals for the Second Circuit. The U.S. Court of Appeals affirmed the initial adverse opinion that the U.S. Tax Court rendered in 2003 against us, with respect to a 1987 transaction, but remanded the case to the U.S. Tax Court to consider a new argument raised. The amount in dispute has been fully paid, and no benefit has been recognized. The U.S. Tax Court has not issued a decision on this remanded matter, and it is uncertain as to when a decision will be rendered.
 
At December 28, 2007, we had a United Kingdom net operating loss carryforward of approximately $13.5 billion. This loss has an unlimited carryforward period and a tax benefit has been recognized for the deferred tax asset with no valuation allowance.
 
During 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). We believe that the estimate of the level of unrecognized tax benefits is in accordance with FIN 48 and is appropriate in relation to the potential for additional assessments. We adjust the level of unrecognized tax benefits when there is more information available, or when an event occurs requiring a change. The reassessment of unrecognized tax benefits could have a material impact on our effective tax rate in the period in which it occurs.

         
Merrill Lynch 2007 Annual Report   page 30    


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   Business Environment(1)
Global financial markets experienced significant stress during 2007, primarily driven by challenging conditions in the credit markets during the second half of the year related to U.S. sub-prime residential mortgages and related assets (including CDOs collateralized by sub-prime residential mortgages), and the markets for loans and bonds related to leveraged finance transactions. For example, during the second half of the year ABX indices experienced significant widening, with the A and AAA classes moving substantially off par for the first time in 2007. This adverse market environment began to intensify in the beginning of the third quarter and was characterized by significant credit spread widening, prolonged illiquidity, reduced price transparency and increased volatility. As conditions in these markets deteriorated, other areas such as the asset-backed commercial paper market also experienced decreased liquidity, and the equity markets experienced short-term weakness and increased volatility. In response to these conditions, the Federal Reserve, the European Central Bank and other central banks injected significant liquidity into the markets during the second half of the year and the Federal Reserve System’s Federal Open Market Committee (“FOMC”) lowered benchmark interest rates by 100 basis points to 4.25% at year-end. In addition, the FOMC reduced benchmark interest rates by 125 basis points in January 2008. Long-term interest rates, as measured by the 10-year U.S. Treasury bond, ended the year at 4.03%, down from 4.71% at the end of 2006. In the equity markets, major U.S. equity indices increased moderately during 2007 with the Dow Jones Industrial Average, the NASDAQ Composite Index and the Standard & Poor’s 500 Index up by 6%, 10% and 4%, respectively. Oil prices hit a record high and the U.S. dollar hit a low against the euro during the year. Overall the global economy continued to grow during 2007, albeit slower than in 2006.
 
Global fixed income trading volumes increased during the year in asset classes such as U.S. government and agency securities with average daily trading volumes up approximately 8% and 11%, respectively. Trading volumes across mortgage-backed securities also increased compared to 2006, up approximately 27% during the year despite the reduction in liquidity for certain instruments.
 
Global equity indices generally ended the year with mixed results. In Europe, the Dow Jones STOXX 50 Index was flat from 2006 while the FTSE 100 Index increased 4%. Asian equity markets were mixed as Japan’s Nikkei 225 Stock Average fell 11% while Hong Kong’s Hang Seng Index surged 37%. India’s Sensex Index rose 47%. In Latin America, Brazil’s Bovespa Index was up 44% from 2006.
 
U.S. equity trading volumes increased during the year as both the dollar volume and number of shares traded on the New York Stock Exchange and on the Nasdaq increased compared to 2006. Equity market volatility increased significantly for both the S&P 500 and the Nasdaq 100 during the year, as indicated by higher average levels for the Chicago Board Options Exchange SPX Volatility Index and the American Stock Exchange QQQ Volatility Index, respectively.
 
Global debt and equity underwriting volumes for the full year of 2007 were $7.0 trillion, down 5% from 2006 impacted by decreased volumes during the second half of the year which were down 27%. Global debt underwriting volumes for the full year of 2007 were $5.9 trillion, down 11% from 2006 and were down 39% during the second half of the year compared to the prior-year period. Global equity underwriting volumes of $1.1 trillion were up 50% compared to 2006.
 
Merger and acquisition (“M&A”) activity increased during 2007 as the value of global announced deals was $4.9 trillion, up 24% from 2006. Global completed M&A activity was $4.6 trillion, up 28% from 2006.
 
While our results may vary based on global economic and market trends, we believe that the outlook for growth in most of our global businesses, including Equity Markets, Investment Banking, Global Wealth Management and certain FICC businesses remains favorable due to positive underlying fundamentals, high market volumes, and the resiliency of these markets. This remains especially true for markets outside of the United States, such as the Pacific Rim. However, the challenging conditions in certain credit markets, such as the sub-prime mortgage market, have continued into early 2008. Since year-end, these markets have shown renewed signs of volatility and weakness as evidenced by recent rating agency downgrades of residential mortgage-backed securities and U.S. ABS CDOs, increased expectations of future rating agency actions, and increased default and delinquency rates.
 
During 2007, FICC revenues were adversely affected by the substantial deterioration in the value of many of these exposures, particularly during the second half of 2007. At the end of 2007, we maintained exposures to these markets through securities, derivatives, loans and loan commitments. See U.S. ABS CDO and Other Mortgage-Related Activities on page 34 for further detail.
 
The markets for these U.S. ABS CDO exposures remain extremely illiquid and as a result, valuation of these exposures is complex and involves a comprehensive process including the use of quantitative modeling and management judgment. Valuation of these exposures will also continue to be impacted by external market factors including default rates, rating agency actions, and the prices at which observable market transactions occur. Our ability to mitigate our risk by selling or hedging our exposures is also limited by the market environment. Our future results may continue to be materially impacted by these positions.
(1) Debt and equity underwriting and merger and acquisition volumes were obtained from Dealogic.

         
    page 31   (Bull Graphic)


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   Results of Operations
                                         
                      % CHANGE  
                      2007 VS.
    2006 VS.
 
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)   2007     2006 (1)   2005     2006     2005  
Revenues
                                       
Principal transactions
  $ (12,067 )   $ 7,248     $ 3,647       N/M       99 %
Commissions
    7,284       5,985       5,277       22 %     13  
Investment banking
    5,582       4,648       3,777       20       23  
Managed accounts and other fee-based revenues
    5,465       6,273       5,701       (13 )     10  
Earnings from equity method investments
    1,627       556       567       193       (2 )
Other
    (2,190 )     2,883       1,848       N/M       56  
                                         
Subtotal
    5,701       27,593       20,817       (79 )     33  
Interest and dividend revenues
    56,974       39,790       26,031       43       53  
Less interest expense
    51,425       35,571       21,571       45       65  
                                         
Net interest profit
    5,549       4,219       4,460       32       (5 )
Gain on merger
          1,969             N/M       N/M  
                                         
Revenues, net of interest expense
    11,250       33,781       25,277       (67 )     34  
                                         
Non-interest expenses:
                                       
Compensation and benefits
    15,903       16,867       12,314       (6 )     37  
Communications and technology
    2,057       1,838       1,599       12       15  
Brokerage, clearing, and exchange fees
    1,415       1,096       855       29       28  
Occupancy and related depreciation
    1,139       991       931       15       6  
Professional fees
    1,027       885       729       16       21  
Advertising and market development
    785       686       593       14       16  
Office supplies and postage
    233       225       209       4       8  
Other
    1,522       1,383       1,286       10       8  
                                         
Total non-interest expenses
    24,081       23,971       18,516       0       29  
                                         
Pre-tax (loss)/earnings from continuing operations
  $ (12,831 )   $ 9,810     $ 6,761       N/M       45  
Income tax (benefit)/expense
    (4,194 )     2,713       1,946       N/M       39  
                                         
Net (loss)/earnings from continuing operations
  $ (8,637 )   $ 7,097     $ 4,815       N/M       47  
                                         
Discontinued operations:
                                       
Pre-tax earnings from discontinued operations
  $ 1,397     $ 616     $ 470       127       31  
Income tax expense
    537       214       169       151       27  
                                         
Net earnings from discontinued operations
  $ 860     $ 402     $ 301       114       34  
                                         
                                         
Net (loss)/earnings
  $ (7,777 )   $ 7,499     $ 5,116       N/M       47  
                                         
                                         
Basic (loss)/earnings per common share from continuing operations
  $ (10.73 )   $ 7.96     $ 5.32       N/M       50  
Basic earnings per common share from discontinued operations
    1.04       0.46       0.34       126       35  
                                         
Basic (loss)/earnings per common share
  $ (9.69 )   $ 8.42     $ 5.66       N/M       49  
                                         
Diluted (loss)/earnings per common share from continuing operations
  $ (10.73 )   $ 7.17     $ 4.85       N/M       48  
Diluted earnings per common share from discontinued operations
    1.04       0.42       0.31       148       35  
                                         
Diluted (loss)/earnings per common share
  $ (9.69 )   $ 7.59     $ 5.16       N/M       47  
                                         
Return on average common stockholders’ equity
from continuing operations
    N/M       20.1 %     15.0 %     N/M       5.1 pts  
Return on average common stockholders’ equity
    N/M       21.3 %     16.0 %     N/M       5.3 pts  
                                         
Book value per common share
  $ 29.34     $ 41.35     $ 35.82       (29 )     15  
                                         
                                         
N/M = Not Meaningful
(1) 2006 results include the one-time compensation expenses associated with the adoption of SFAS No. 123 as revised in 2004, Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123R”) and the positive net impact from the closing of the BlackRock merger. For more information on SFAS No. 123R or the BlackRock merger, refer to Notes 1 and 18, respectively, to the Consolidated Financial Statements.

         
Merrill Lynch 2007 Annual Report   page 32    


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   Consolidated Results of Operations
Our net loss from continuing operations was $8.6 billion for 2007 compared to net earnings from continuing operations of $7.1 billion in 2006 as net revenues in 2007 declined 67% from the prior year. The decrease in net revenues was primarily driven by our credit and structured finance and investment businesses which were impacted by deterioration in the credit markets, resulting in net losses on our U.S. ABS CDO and sub-prime residential mortgage positions and non-investment grade lending commitments. Losses per diluted share from continuing operations were $10.73 for 2007, compared to net earnings per diluted share of $7.17 in 2006. Net earnings from discontinued operations were $860 million up from $402 million in 2006, driven by a net gain of $316 million recognized on the sale of MLIG. Refer to Note 17 to the Consolidated Financial Statements for additional information on discontinued operations.
 
2007 Compared to 2006
Principal transactions revenues include both realized and unrealized gains and losses on trading assets and trading liabilities and investment securities classified as trading investments. Principal transactions revenues were negative $12.1 billion compared to $7.2 billion a year-ago driven primarily by losses in our credit and structured finance and investment businesses, which includes our U.S. ABS CDO and residential mortgage-related businesses. Deterioration in the credit markets, prolonged illiquidity, reduced price transparency, increased volatility and a weaker U.S. housing market all contributed to the decline in these businesses and the difficult environment experienced, particularly in the third and fourth quarters of 2007. These decreases were partially offset by increases in revenues generated from our rates and currencies, equity-linked, cash equities trading and financing and services businesses as well as gains arising from the widening of Merrill Lynch credit spreads on certain of our long-term debt liabilities. Principal transactions revenues are primarily reported in our GMI business segment. Please refer to the FICC and Equity Markets discussions within the GMI business segment results for additional details on the key drivers.
 
Net interest profit is a function of (i) the level and mix of total assets and liabilities, including trading assets owned, deposits, financing and lending transactions, and trading strategies associated with our businesses, and (ii) the prevailing level, term structure and volatility of interest rates. Net interest profit is an integral component of trading activity. In assessing the profitability of our client facilitation and trading activities, we view principal transactions and net interest profit in the aggregate as net trading revenues. Changes in the composition of trading inventories and hedge positions can cause the mix of principal transactions and net interest profit to fluctuate. Net interest profit was $5.5 billion, up 32% from 2006 due primarily to higher net interest revenue from deposit spreads earned and higher returns from interest-bearing assets reflecting higher average asset balances in 2007, partially offset by increased interest expense driven by increased average long and short-term borrowings in 2007. Net interest profit is reported in both our GMI and GWM business segments.
 
Commissions revenues primarily arise from agency transactions in listed and OTC equity securities and commodities, insurance products and options. Commission revenues also include distribution fees for promoting and distributing mutual funds and hedge funds. Commission revenues were $7.3 billion, up 22% from 2006, due primarily to an increase in global transaction volumes, particularly in listed equities and mutual funds as a result of increased market volatility. Commissions revenues are primarily reported in our GMI business segment, and a portion is also reported in GWM.
 
Investment banking revenues include (i) origination revenues representing fees earned from the underwriting of debt, equity and equity-linked securities, as well as loan syndication and commitment fees and (ii) strategic advisory services revenues including merger and acquisition and other investment banking advisory fees. Investment banking revenues were $5.6 billion, up 20% from 2006, driven by increased revenues in equity origination and strategic advisory services, which were partially offset by a decline in revenues from debt origination primarily related to the leveraged finance business. Investment banking revenues are primarily reported in our GMI business segment but also include origination revenues in GWM. Please refer to the Investment Banking discussion within the GMI business segment results for additional detail on the key drivers.
 
Managed accounts and other fee-based revenues primarily consist of asset-priced portfolio service fees earned from the administration of separately managed and other investment accounts for retail investors, annual account fees, and certain other account-related fees. In addition, until the BlackRock merger at the end of the third quarter of 2006, managed accounts and other fee-based revenues also included fees earned from the management and administration of retail mutual funds and institutional funds such as pension assets, and performance fees earned on certain separately managed accounts and institutional money management arrangements. Managed accounts and other fee-based revenues were $5.5 billion, down 13% from 2006, driven primarily by the absence of MLIM’s asset management revenues in 2007 as a result of the BlackRock merger at the end of the third quarter of 2006. This decrease was partially offset by higher asset-based fees in GWM reflecting the impact of net inflows into fee-based accounts and higher average equity market values. Managed accounts and other fee-based revenues are primarily driven by our GWM business segment. Please refer to the GWM business segment discussion for additional detail on the key drivers.
 
Earnings from equity method investments include our pro rata share of income and losses associated with investments accounted for under the equity method of accounting. Earnings from equity method investments were $1.6 billion, up 193% from 2006 primarily driven

         
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by increased earnings from our investments in BlackRock and certain partnerships. Refer to Note 5 to the Consolidated Financial Statements for further information on equity method investments.
 
Other revenues include gains/(losses) on investment securities, including unrealized losses on certain available-for-sale securities, gains/(losses) on private equity investments that are held for capital appreciation and/or current income, and gains/(losses) on loans and other miscellaneous items. Other revenues were negative $2.2 billion, compared to $2.9 billion in 2006. The decrease primarily reflects loan-related losses of $1.7 billion, a year-over-year decrease in the value of our private equity investments of $1.2 billion, due primarily to the decline in value of our publicly traded investments, other than temporary impairment charges on available-for-sale securities of approximately $900 million and write-downs of approximately $600 million on leveraged finance commitments.
 
The gain on the merger with BlackRock was $2.0 billion in 2006. This non-recurring gain entirely related to the merger of Merrill Lynch’s MLIM business with BlackRock that was completed in the third quarter of 2006. For more information on this merger, refer to Note 18 to the Consolidated Financial Statements.
 
Compensation and benefits expenses were $15.9 billion for 2007, compared to $16.9 billion in 2006, which included a one-time charge of approximately $1.8 billion related to the adoption of SFAS No. 123R Share Based Payment (“SFAS No. 123R”). Excluding this one-time charge in 2006, compensation expenses were up approximately 6%, reflecting higher staffing levels and increased productivity from financial advisors, partially offset by the absence of compensation expenses related to MLIM in 2007. While compensation expenses increased, average compensation per employee was down in 2007 from 2006 levels. See Exhibit 99.1, filed with our 2007 10-K, for a reconciliation of non-GAAP measures.
 
Non-compensation expenses were $8.2 billion in 2007, up 15% from 2006. Communication and technology costs were $2.1 billion, up 12% from 2006 primarily due to increased costs related to a significant number of system development projects. Brokerage, clearing and exchange fees were $1.4 billion, up 29% from 2006, primarily due to higher transaction volumes, higher equity brokerage fees and exchange fees. Occupancy costs and related depreciation were $1.1 billion, up 15% from a year-ago principally due to higher office rental expenses and office space added via acquisitions. Professional fees were $1.0 billion, up 16% from 2006 driven by higher legal and other professional costs. Advertising and market development costs were $785 million, up 14% from 2006 primarily due to increased costs associated with increased business activity and higher deal-related expenses. Other expenses were $1.5 billion, up 10% from a year ago due primarily to the write-off of $160 million of identifiable intangible assets related to our acquisition of the First Franklin mortgage origination franchise and related servicing platform acquired from National City Corporation (collectively “First Franklin”). For further information on First Franklin, refer to Note 16 to the Consolidated Financial Statements.
 
U.S. ABS CDO and Other Mortgage-Related Activities
The challenging market conditions that existed during the second half of 2007, particularly those relating to ABS CDOs and sub-prime residential mortgages, remained at year end. Despite the significant reduction of our net exposures to these markets during the third and fourth quarters, at year end we maintained exposures to these markets through securities, derivatives, loans and loan commitments. The following discussion details our activities and net exposures at the end of 2007.
 
U.S. Sub-Prime Residential Mortgage-Related Activities
We view sub-prime mortgages as single-family residential mortgages displaying more than one high risk characteristic, such as: (i) the borrower has a low FICO score (generally below 660); (ii) a high loan-to-value (“LTV”) ratio (LTV greater than 80% without borrower paid mortgage insurance); (iii) the borrower has a high debt-to-income ratio (greater than 45%); or (iv) stated/limited income documentation. Sub-prime mortgage-related securities are those securities that derive more than 50% of their value from sub-prime mortgages.
 
As part of our U.S. sub-prime residential mortgage-related activities, sub-prime mortgage loans were originated through First Franklin or purchased in pools from third-party originators for subsequent sale or securitization. Mortgage-backed securities are structured based on the characteristics of the underlying mortgage collateral, sold to investors and subsequently traded in the secondary capital markets. As a result of the significant deterioration in the sub-prime mortgage market in 2007, we have substantially reduced our U.S. sub-prime residential mortgage origination, mortgage purchase, and securitization activities, as well as warehouse lending facilities. As of December 28, 2007 we have ceased originating sub-prime mortgages and are evaluating our continued involvement in this market.
 
At December 28, 2007, our U.S. sub-prime residential mortgage net exposure (excluding Merrill Lynch’s bank sub-prime residential mortgage-related securities portfolio which is described in U.S. Banks Investment Securities Portfolio) consisted of the following:
 
•  Sub-prime whole loans: First Franklin originated mortgage loans through its retail and wholesale channels. Additionally, we purchased pools of whole loans from third-party mortgage originators. As a result of the significant deterioration in the sub-prime mortgage market in 2007, we currently are not originating or purchasing sub-prime residential mortgages. Prior to their sale or securitization, whole loans are predominantly reported on our consolidated balance sheets in loans, notes and mortgages and we account for such loans as held for sale.

         
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We value securitizable whole loans on an “as-if” securitized basis based on estimated performance of the underlying mortgage pool collateral, rating agency credit structure assumptions and market pricing for similar securitizations. Key characteristics include underlying borrower credit quality and collateral performance, mortgage terms and conditions, assumptions on prepayments, delinquencies and defaults. Non-securitizable loans are valued using a combination of discounted liquidation value and re-performing value.
 
•  Residuals: We retain and purchase mortgage residual interests, which represent the subordinated classes and equity/first-loss tranche from our residential mortgage-backed securitization activity. We have retained residuals from the securitizations of third-party whole loans we have purchased as well as from our First Franklin loan originations.
 
We value residuals by modeling the present value of projected cash flows that we expect to receive, based on actual and projected performance of the mortgages underlying a particular securitization. Key determinants affecting our estimates of future cash flows include estimates for borrower prepayments, delinquencies, defaults and loss severities. Modeled performance and loan level loss projections are adjusted monthly to reflect actual borrower performance information that we receive from trustees and loan servicers.
 
•  Residential mortgage-backed securities (“RMBS”): We retain and purchase securities from the securitizations of loans, including sub-prime residential mortgages. We value RMBS securities based on observable prices and securitization cash flow model analysis.
 
•  Warehouse lending: Warehouse loans represent collateralized revolving loan facilities to originators of financial assets, such as sub-prime residential mortgages. These mortgages typically serve as collateral for the facility. We generally value these loans at amortized cost with an allowance for loan losses established for credit losses estimated to exist in the portfolio unless deemed to be permanently impaired. In the case of an impairment, the loan receivable value is adjusted to reflect the valuation of the whole loan collateral underlying the facility if the value is less than amortized cost.
 
The following table provides a summary of our residential mortgage-related net exposures and losses, excluding net exposures to residential mortgage-backed securities held in our U.S. banks for investment purposes which is described in the U.S. Banks Investments Securities Portfolio section below.
 
               
    NET EXPOSURES
  NET LOSSES FOR THE
 
    AS OF
  YEAR ENDED
 
(DOLLARS IN MILLIONS)   DEC. 28, 2007   DEC. 28, 2007 (1)
Residential Mortgage-Related Net Exposures and Losses
(excluding U.S. Banks Investment Securities Portfolio):
             
U.S. Sub-prime:
             
Warehouse lending
  $ 137   $ (31 )
Whole loans
    994     (1,243 )
Residuals
    855     (1,582 )
Residential mortgage-backed securities
    723     (332 )
               
Total U.S. sub-prime
  $ 2,709   $ (3,188 )
               
U.S. Alt-A
    2,687     (542 )
U.S. Prime
    28,189     N/A  
Non-U.S.
    9,582     (465 )
Mortgage servicing rights
    389     N/A  
               
Total
  $ 43,556   $ (4,195 )
               
               
(N/A) Not applicable as these areas did not generate net losses for the year ended December 28, 2007.
(1) Primarily represents unrealized losses on net exposures.
 
During 2007, our U.S. sub-prime residential mortgage-related net exposures declined significantly as a result of unrealized losses incurred, securitizations, sales, hedges and changes in loan commitments and related funding.
 
Other Residential Mortgage-Related Activities
In addition to our U.S. sub-prime related net exposures, we also had net exposures related to other residential mortgage-related activities. These activities consist of the following:
 
•  U.S. Alt-A: We had net exposures of $2.7 billion at the end of 2007, which consisted primarily of residential mortgage-backed securities collateralized by Alt-A residential mortgages. These net exposures resulted from secondary market trading activity or were retained from our securitizations of Alt-A residential mortgages, which were purchased from third-party mortgage originators. We do not originate Alt-A mortgages.
 
We view Alt-A mortgages as single-family residential mortgages that are generally higher credit quality than sub-prime loans but have characteristics that would disqualify the borrower from a traditional prime loan. Alt-A lending characteristics may include one

         
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or more of the following: (i) limited documentation; (ii) high combined-loan-to-value (‘‘CLTV”) ratio (CLTV greater than 80%); (iii) loans secured by non-owner occupied properties; or (iv) debt-to-income ratio above normal limits.
 
•  U.S. Prime: We had net exposures of $28.2 billion at the end of 2007, which consisted primarily of prime mortgage whole loans, including approximately $12 billion of prime loans originated with GWM clients and $9.7 billion of prime loans originated by First Republic, an operating division of Merrill Lynch Bank & Trust Co., FSB (“MLBT-FSB”). We also purchase prime whole loans from third-party originators for securitization and for the investment portfolios of Merrill Lynch Bank USA (“MLBUSA”) and MLBT-FSB.
 
•  Non-U.S.: We had net exposures of $9.6 billion at the end of 2007 which consisted primarily of residential mortgage whole loans originated in the United Kingdom, as well as through mortgage originators in the Pacific Rim.
 
•  Mortgage Servicing Rights: We own approximately $400 million of mortgage servicing rights which represent the right to current and future cash flows based on contractual servicing fees for mortgage loans. In connection with our residential mortgage businesses, we may retain or acquire mortgage servicing rights. See Note 6 to the Consolidated Financial Statements for further information.
 
U.S. ABS CDO Activities
In addition to our U.S. sub-prime residential mortgage-related exposures, we have exposure to U.S. ABS CDOs, which are securities collateralized by a pool of asset-backed securities (“ABS”), for which the underlying collateral is primarily sub-prime residential mortgage loans.
 
We engaged in the underwriting and sale of U.S. ABS CDOs, which involved the following steps: (i) determining investor interest or responding to inquiries or mandates received; (ii) engaging a CDO collateral manager who is responsible for selection of the ABS securities that will become the underlying collateral for the U.S. ABS CDO securities; (iii) obtaining credit ratings from one or more rating agencies for U.S. ABS CDO securities; (iv) securitizing and pricing the various tranches of the U.S. ABS CDO at representative market rates; and (v) distributing the U.S. ABS CDO securities to investors or retaining them for Merrill Lynch. As a result of the significant deterioration in the sub-prime mortgage market in 2007, we currently are not underwriting U.S. ABS CDOs.
 
Our U.S. ABS CDO net exposure primarily consists of our super senior ABS CDO portfolio, as well as secondary trading exposures related to our ABS CDO business.
 
U.S. Super Senior ABS CDO Portfolio
Super senior positions represent our exposure to the senior most tranche in an ABS CDO’s capital structure. This tranche’s claims have priority to the proceeds from liquidated cash ABS CDO assets. Our exposure to super senior ABS CDOs includes the following securities, which are primarily held as derivative positions in the form of total return swaps:
 
•  High-grade super senior positions, which are ABS CDOs with underlying collateral having an average credit rating of Aa3/A1 at inception of the underwriting by Moody’s Investor Services;
 
•  Mezzanine super senior positions, which are ABS CDOs with underlying collateral having an average credit rating of Baa2/Baa3 at inception of the underwriting by Moody’s Investor Services; and
 
•  CDO-squared super senior positions, which are ABS CDOs with underlying collateral consisting of other ABS CDO securities which have collateral attributes typically similar to high-grade and mezzanine super senior positions.
 
Despite the credit rating of these ABS CDO securities (typically AAA at inception of the underwriting), their fair value at December 28, 2007 reflected unprecedented market illiquidity and the deterioration in the value of the underlying sub-prime mortgage collateral. Additionally, rating agencies have been actively reviewing, and in some cases downgrading, these assets and we expect that they will continue to be subject to ongoing rating agency review in the near term.
 
Secondary Trading Related to the ABS CDO Business
We have secondary trading exposures related to our ABS CDO business, which consists of RMBS and CDO positions previously held in CDO warehouses awaiting securitization, retained securities from CDO securitizations, and related hedges.
 
For total U.S. super senior ABS CDOs, long exposures were $30.4 billion and short exposures were $23.6 billion at December 28, 2007. Short exposures primarily consist of purchases of credit default swap protection from various third parties, including financial guarantors, insurers and other market participants.

         
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The following table provides a summary of our U.S. super senior ABS CDO net exposures and our secondary trading exposures related to our ABS CDO business as of December 28, 2007. Derivative exposures are represented by their notional amounts as opposed to fair value.
 
                 
    NET EXPOSURES
    NET LOSSES FOR THE
 
    AS OF
    YEAR ENDED
 
(DOLLARS IN MILLIONS)   DEC. 28, 2007 (1)   DEC. 28, 2007 (2)
U.S. ABS CDO net exposures and losses:
               
U.S. super senior ABS CDO net exposures:
               
High-grade
  $ 4,380     $ (7,362 )
Mezzanine
    2,184       (6,066 )
CDO-squared
    271       (1,163 )
                 
Total super senior ABS CDO net exposures and losses
    6,835       (14,591 )
Secondary trading
    (1,997 )     (2,104 )
                 
Total U.S. ABS CDO-related net exposures and losses
  $ 4,838     $ (16,695 )
                 
                 
(1) Represents long and short exposure of hedges. These hedges are affected by a variety of factors that impact the degree of their effectiveness, including differences in attachment point, timing of cash flows, control rights, litigation, the creditworthiness of the counterparty, limited recourse to counterparties and other basis risks.
(2) Primarily represents unrealized losses on net exposures. Amounts exclude credit valuation adjustments of negative $2.6 billion related to financial guarantor exposures on U.S. super senior ABS CDOs. See table regarding financial guarantor exposures.
 
Financial Guarantors
We hedge a portion of our gross exposures to U.S. super senior ABS CDOs with various market participants, including financial guarantors. Financial guarantors are generally highly rated monoline insurance companies that provide credit support for a security either through a financial guaranty insurance policy on a particular security or through an instrument such as a credit default swap (“CDS”). Under a CDS, the financial guarantor generally agrees to compensate the counterparty to the swap for the deterioration in the value of the underlying security upon an occurrence of a credit event, such as a failure by the underlying obligor on the security to pay principal or interest.
 
We hedged a portion of our gross exposures on U.S. super senior ABS CDOs with certain financial guarantors through the execution of CDS that are structured to replicate standard financial guaranty insurance policies, which provide for timely payment of interest and ultimate payment of principal at their scheduled maturity date. CDS gains and losses are based on the fair value of the referenced ABS CDOs. Depending upon the creditworthiness of the financial guarantor hedge counterparty, we may record credit valuation adjustments in estimating the fair value of the CDS.
 
At December 28, 2007 our short exposures from credit default swaps with financial guarantors to economically hedge certain U.S. super senior ABS CDOs was $13.8 billion, which represented credit default swaps with a notional amount of $19.9 billion that have been adjusted for mark-to-market gains of $6.1 billion. The fair value of these credit default swaps at December 28, 2007 was $3.5 billion, after taking into account a $2.6 billion credit valuation adjustment related to certain financial guarantors. Subsequent to year-end, market conditions have deteriorated resulting in negative rating agency actions for certain financial guarantors. We continue to monitor industry and company specific developments. Further credit deterioration of the financial guarantors who are counterparties to our credit derivatives could have an adverse effect on our future financial performance.
 
The following table provides a summary of our total financial guarantor exposures for U.S. super senior ABS CDOs as of December 28, 2007.
                                     
          NOTIONAL
               
          OF CDS,
               
          NET OF GAINS
    MARK-TO-MARKET
         
          PRIOR TO CREDIT
    GAINS PRIOR TO
  CREDIT
     
    NOTIONAL
    VALUATION
    CREDIT VALUATION
  VALUATION
    MARK-TO-MARKET
(DOLLARS IN MILLIONS)   OF CDS (1)   ADJUSTMENT     ADJUSTMENTS   ADJUSTMENTS     VALUE OF CDS
Credit Default Swaps with Financial Guarantors(2):
                                   
By counterparty credit quality(3):
                                   
AAA
  $ (13,237 )   $ (9,104 )   $ 4,133   $ (679 )   $ 3,454
AA
                         
A
                         
BBB
                         
Non-investment grade or unrated
    (6,664 )     (4,735 )     1,929     (1,929 )    
                                     
Total
  $ (19,901 )   $ (13,839 )   $ 6,062   $ (2,608 )   $ 3,454
                                     
                                     
(1) Represents gross notional amount of credit default swaps purchased as protection for U.S. super senior ABS CDOs. Amounts do not include counterparty exposure with financial guarantors for other asset classes.
(2) Excludes the benefit of $2.0 billion (notional) of credit default swaps purchased from unrelated third parties as protection for exposure to financial guarantors, as well as the related positive mark-to-market adjustments.
(3) Represents rating agency credit ratings as of December 28, 2007.

         
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U.S. Banks Investment Securities Portfolio
The investment securities portfolio of MLBUSA and MLBT-FSB includes investment securities comprising various asset classes. The investment portfolio includes sub-prime mortgage-related securities, as well as ABS CDOs whose underlying collateral includes certain sub-prime residential mortgage-backed securities. See Note 5 to the Consolidated Financial Statements for realized and unrealized gains and losses associated with Merrill Lynch’s investment securities.
 
At December 28, 2007, our net exposures to sub-prime mortgage related securities and ABS CDOs whose underlying collateral includes sub-prime residential mortgage-backed securities in the U.S. banks investment portfolio was $4.2 billion. The amount of losses related to these securities recognized in our 2007 Consolidated Statement of (Loss)/Earnings was approximately $700 million.
 
Other Exposures in the U.S. Banks Investment Securities Portfolio
In addition to the U.S. sub-prime residential mortgage-related securities, our U.S. banks investment securities portfolio also includes other securities at December 28, 2007 consisting of Alt-A residential mortgage-backed securities (net exposure $7.1 billion), commercial mortgage-backed securities (net exposure $5.8 billion), prime residential mortgage-backed securities (net exposure $4.2 billion), non-residential asset-backed securities (net exposure $1.2 billion) and non-residential CDOs (net exposure $0.9 billion). These securities are included as part of our overall available-for-sale investment portfolio and recorded in mortgage and asset-backed securities.
 
MLBUSA acts as administrator to a Merrill Lynch established asset-backed commercial paper conduit (“Conduit”) vehicle and previously acted as administrator for another Merrill Lynch established Conduit. MLBUSA also either provides or provided liquidity facilities to these Conduits and to a third Conduit, not established by Merrill Lynch, that protect commercial paper holders against short term changes in the fair value of the assets held by the Conduits in the event of a disruption in the commercial paper market, as well as credit facilities to the Conduits that protect commercial paper investors against credit losses for up to a certain percentage of the portfolio of assets held by the respective Conduits. The assets owned by these Conduits included sub-prime residential mortgage-backed securities and ABS CDO securities whose underlying collateral included certain sub-prime residential mortgage-backed securities. During the fourth quarter of 2007, Merrill Lynch purchased the remaining assets of one of the Merrill Lynch established Conduits through the exercise of its liquidity facility and as a result the facility is no longer outstanding. Merrill Lynch does not have any remaining exposure to this Conduit as it is inactive. The assets remaining in the other Merrill Lynch established Conduit are primarily auto and equipment loans and lease receivables. In the fourth quarter of 2007, Merrill Lynch became the primary beneficiary for the remaining Conduit, which was not established by Merrill Lynch, as a result of a reconsideration event under FIN 46R. This Conduit was consolidated by Merrill Lynch and the facility is not considered outstanding. Refer to Notes 6 and 11 to the Consolidated Financial Statements for more information on Conduits.
 
2006 Compared to 2005
Net revenues in 2006 were $33.8 billion, 34% higher than in 2005. Principal transactions revenues in 2006 increased 99%, to $7.2 billion, due primarily to increased revenues from trading of fixed income, currency, commodity and equity products with the strongest increases coming from credit products, commodities and proprietary trading. Net interest profit in 2006 was $4.2 billion, down 5% due primarily to the impact of rising rates on municipal and equity derivatives and increased interest expense from higher long-term borrowings and funding charges, partially offset by higher short- term interest rates on deposit spreads earned. Managed accounts and other fee-based revenues in 2006 were $6.3 billion, up 10%, reflecting the impact of net inflows into annuitized-revenue products as well as higher equity market values, partially offset by lower revenues from MLIM resulting from the BlackRock merger. Commission revenues in 2006 were $6.0 billion, up 13% due primarily to a global increase in client transaction volumes, particularly in listed equities and mutual funds. Investment banking revenues of $4.6 billion in 2006 increased 23% from 2005 reflecting increases in both debt and equity origination revenues as well as increased strategic advisory revenues. Other revenues were $2.9 billion, up from $1.8 billion due primarily to higher revenues from our private equity investments.
 
Compensation and benefits expenses were $16.9 billion in 2006, up 37% from 2005, reflecting higher incentive compensation associated with increased net revenues, as well as higher staffing levels. Our 2006 compensation and benefit expenses also reflect the non-cash compensation expenses incurred in 2006 of $1.8 billion related to the adoption of SFAS No. 123R. Compensation and benefits expenses were 49.9% of net revenues for 2006, as compared to 48.7% in 2005. Excluding the one-time impacts related to the adoption of SFAS No. 123R and the BlackRock merger, compensation and benefits were 47.0% of net revenues for 2006. See Exhibit 99.1, filed with our 2007 10-K, for a reconciliation of non-GAAP measures.
 
Non-compensation expenses were $7.1 billion in 2006, up 15% from 2005. Communications and technology costs were $1.8 billion, up 15% from 2005, due primarily to costs related to technology investments for growth, including acquisitions, and higher market information and communications costs. Brokerage, clearing and exchange fees were $1.1 billion, up 28% from 2005, mainly due to increased transaction volumes. Professional fees were $885 million, up 21% from 2005, reflecting higher legal and consulting fees primarily associated with increased business activity levels. Advertising and market development expenses were $686 million, up 16%

         
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from 2005, due primarily to higher travel expenses associated with increased business activity levels and increased sales promotion and advertising costs.
 
Income Taxes
Income taxes from continuing operations for 2007 were a net credit of $4.2 billion, reflecting a tax benefit associated with the Company’s pre-tax losses. Our 2007 effective tax rate from continuing operations was 32.7%, compared with an effective rate of 27.7% in 2006. The change in the effective tax rate reflected a tax benefit from carry-back claims that reduced the 2006 tax rate and the mix of business. Our 2006 effective tax rate of 27.7% compared with 28.8% in 2005 and reflected a $296 million reduction in the tax provision arising from carry-back claims covering the years 2001 and 2002. Our 2005 tax provision of $1.9 billion reflected the net impact of the business mix, tax settlements, and $97 million of tax associated with the repatriation of $1.8 billion of foreign earnings.
 
   Business Segments
Our operations are currently organized into two business segments: GMI and GWM. GMI provides full service global markets and origination products and services to corporate, institutional, and government clients around the world. GWM creates and distributes investment products and services for individuals, small- and mid-size businesses, and employee benefit plans. For information on the principal methodologies used in preparing the segment results, refer to Note 2 of the Consolidated Financial Statements.
 
The following segment results represent the information that is relied upon by management in its decision-making processes. These results exclude corporate items. Prior year business segment results are restated to reflect reallocations of revenues and expenses that result from changes in our business strategy and organizational structure. Revenues and expenses associated with inter-segment activities are recognized in each segment. In addition, revenue and expense sharing agreements for joint activities between segments are in place, and the results of each segment reflect their agreed-upon apportionment of revenues and expenses associated with these activities. See Note 2 to the Consolidated Financial Statements for further information. Segment results are presented from continuing operations and exclude results from discontinued operations. Refer to Note 17 to the Consolidated Financial Statements for additional information on discontinued operations.
 
Results for the year ended December 29, 2006 include one-time compensation expenses, as follows: $1.4 billion in GMI, $281 million in GWM and $109 million in MLIM; refer to Note 1 of the Consolidated Financial Statements for further information on one-time compensation expenses.
 
Global Markets and Investment Banking
GMI provides trading, capital markets services, and investment banking services to issuer and investor clients around the world. The Global Markets division consists of the fixed income, currencies, commodities, and equity sales and trading activities for investor clients and on a proprietary basis, while the Investment Banking division provides a wide range of origination and strategic advisory services for issuer clients. Global Markets makes a market in securities, derivatives, currencies, and other financial instruments to satisfy client demands. In addition, Global Markets engages in certain proprietary trading activities. Global Markets is a leader in the global distribution of fixed income, currency and energy commodity products and derivatives. Global Markets also has one of the largest equity trading operations in the world and is a leader in the origination and distribution of equity and equity-related products. Further, Global Markets provides clients with financing, securities clearing, settlement, and custody services and also engages in principal investing in a variety of asset classes and private equity investing. The Investment Banking division raises capital for its clients through underwritings and private placements of equity, debt and related securities, and loan syndications. Investment Banking also offers advisory services to clients on strategic issues, valuation, mergers, acquisitions and restructurings.
 
Global Markets
Global Markets revenues are reported in two major categories based on asset class: FICC and Equity Markets. These categories include the following businesses:
 
Fixed Income, Currencies and Commodities (FICC)
 
•  Global Commercial Real Estate — responsible for secured commercial real estate lending, securitizations related to these transactions, as well as principal and equity investments in real estate;
 
•  Global Commodities — responsible for marketing, trading, storage, transportation and all associated activities with respect to physical and financially-settled commodities, including natural gas and natural gas liquids, power, crude oil and petroleum products, coal, metals, emissions, soft commodities and weather and commodity indices on a global basis, as well as energy and weather risk management;
 
•  Global Credit — responsible for sales and trading activities for money market instruments, investment grade debt, credit derivatives, structured credit products, syndicated loans, high-yield debt, distressed and emerging markets debt, as well as collateralized mortgage obligations, asset-backed securities, and pass-through mortgage obligations;
 
•  Global Currencies — responsible for sales and trading activities for currency, exotic options, forwards and local currency trading;

         
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•  Municipals — responsible for origination, sales and trading of U.S. municipal securities;
 
•  Global Rates — responsible for sales and trading activities for interest rate derivatives, U.S. government and other federal agency securities, obligations of other sovereigns, repurchase and resale financing and debt financial futures and options;
 
•  Global Structured Finance & Investments — responsible for asset-based lending, residential real estate lending, servicing and securitizations related to these transactions, asset-liability management for the investment securities portfolios of our bank subsidiaries, as well as principal and equity investments in other secured assets; and
 
•  Other FICC — includes gains and losses from other FICC related investments and activities not directly attributable to the businesses above and corporate allocations, including the impact associated with the widening of our credit spreads on the carrying value of certain long-term liabilities.
 
Equity Markets
 
•  Global Cash Equity Trading — responsible for our full-service cash equity trading and portfolio and electronic trading capabilities;
 
•  Global Equity-Linked Products — responsible for sales and trading activities in equity-linked derivatives including exchange-traded and OTC options, convertible securities, financial futures and structured products;
 
•  Global Markets Financing and Services — responsible for equity financing and services, including prime brokerage, stock lending, money manager services and clearing, settlement and custody functions;
 
•  Global Private Equity — executes private equity investments and manages these assets primarily for our own account and for that of certain investment partnerships, including employee partnerships;
 
•  Strategic Risk Group — responsible for proprietary risk trading that encompasses both qualitative and quantitative strategies across multiple asset classes; and
 
•  Other Equity Markets — includes gains and losses from other Equity Markets related investments and activities not directly attributable to the businesses above and corporate allocations, including the impact associated with the widening of our credit spreads on the carrying value of certain long-term liabilities.
 
Investment Banking
Investment Banking includes the following groups:
 
•  Corporate Finance — responsible for structured product capabilities, financial product development and commodities origination;
 
•  Country/Sector Coverage — responsible for all origination and advisory activities across countries and sectors on behalf of issuer clients;
 
•  Debt Capital Markets — responsible for all capital related activities for issuer clients generated in the high-grade debt markets including derivative products, liability management, private placements, money markets, and structured transactions;
 
•  Equity Capital Markets — responsible for all capital related activities for issuer clients generated in the equity markets, including convertible securities and equity derivative products;
 
•  Executive Client Coverage — senior client relationship managers who focus exclusively on strengthening relationships and maximizing opportunities with key clients;
 
•  Leveraged Finance — responsible for all financing activities for non-investment grade issuer clients, including high-yield bonds and syndicated loans; and
 
•  Mergers and Acquisitions — responsible for advising clients regarding strategic alternatives, divestitures, mergers, acquisition and restructuring activities.
 
GMI’s 2007 Developments
During 2007, GMI recorded negative net revenues and a pre-tax loss, as record net revenues from Equity Markets and Investment Banking were more than offset by net losses in FICC. The FICC business was adversely impacted by a challenging market environment, particularly in the second half of the year. The combination of the deterioration in the credit markets, a decline in liquidity, reduced price transparency, increased volatility, and a weak U.S. housing market had a materially negative impact on our global credit and global structured finance and investments businesses within FICC.
 
In FICC, many of our businesses away from U.S. ABS CDO and U.S. sub-prime continued to perform well. Our global rates and global currencies businesses both had record years, as we continued to strengthen these businesses with incremental headcount and infrastructure. Additionally, we continued to broaden the scope of the global commodities business in terms of product, geography, and linkage to the broader client franchise, including trading in oil and metals and geographically in the Pacific Rim.
 
On December 24, 2007, we announced that we had reached an agreement to sell most of Merrill Lynch Capital, a wholly owned middle market commercial financing business within FICC to GE Capital. This transaction reflects our continued strategic focus on divesting non-core assets and optimizing capital allocation across businesses. The sale was completed on February 4, 2008.

         
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In Equity Markets, we continued to enhance our leading cash equity trading platform by adding to our portfolio and electronic trading capabilities through additional investments in personnel and technology. We also made progress in our global equity-linked trading business, another key area of investment by expanding our product groups in Europe and the Pacific Rim. Our global markets financing and services business, which includes prime brokerage, continued to expand its products to include additional synthetic offerings. The strategic risk group, our distinct proprietary trading business, also continued investments in personnel and infrastructure that provided the capabilities to take risk when market opportunities arose. We also continued to make significant new investments in our global private equity business, expand globally and leverage our global investment banking coverage. Overall, our equity business continued to strengthen its linkages with our GWM business.
 
In Investment Banking, we continued to expand our origination and advisory capabilities, adding to our global headcount in a targeted manner to improve the breadth and depth of our client franchise. During 2007, we focused on strengthening our footprint in emerging markets. In addition to traditional underwriting and advisory services, we also increasingly provided clients with integrated, multi-faceted solutions that span geographies, asset classes and products such as private equity, derivatives and commodities. We made significant progress increasing linkages with our GWM business.
 
GMI’s Results of Operations
                                         
                      % CHANGE  
                      2007 VS.
    2006 VS.
 
(DOLLARS IN MILLIONS)   2007     2006     2005     2006     2005  
Global Markets
                                       
FICC
  $ (15,873 )   $ 7,552     $ 5,798       N/M       30 %
Equity Markets
    8,286       6,730       4,356       23 %     54  
                                         
Total Global Markets revenues, net of interest expense
    (7,587 )     14,282       10,154       N/M       41  
                                         
Investment Banking
                                       
Origination:
                                       
Debt
    1,550       1,704       1,424       (9 )     20  
Equity
    1,629       1,220       952       34       28  
Strategic Advisory Services
    1,740       1,099       882       58       25  
                                         
Total Investment Banking revenues, net of interest expense
    4,919       4,023       3,258       22       23  
                                         
Total GMI revenues, net of interest expense
    (2,668 )     18,305       13,412       N/M       36  
                                         
Non-interest expenses before one-time
compensation expenses
    13,677       11,644       8,744       17       33  
One-time compensation expenses
          1,369             N/M       N/M  
                                         
Pre-tax (loss)/earnings from continuing operations
  $ (16,345 )   $ 5,292     $ 4,668       N/M       13  
                                         
                                         
Pre-tax profit margin
    N/M       28.9 %     34.8 %                
Total full-time employees
    12,300       9,500       7,700                  
                                         
                                         
N/M = Not Meaningful
 
GMI’s 2007 net revenues were negative $2.7 billion, down significantly from the record net revenues recorded in 2006. Pre-tax loss from continuing operations was $16.3 billion, compared to record earnings from continuing operations of $5.3 billion in the prior-year period. The 2007 loss was primarily driven by net write-downs of $20.6 billion related to U.S. ABS CDOs and sub-prime mortgages and securities, and $2.6 billion related to increased credit valuation adjustments against financial guarantor counterparties related to U.S. ABS CDOs. GMI’s 2007 net revenues also included a gain of approximately $1.9 billion due to the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term liabilities.
 
GMI’s 2006 net revenues were $18.3 billion, up 36% from the prior year. Pre-tax earnings of $5.3 billion and pre-tax profit margin of 28.9% included $1.4 billion in one-time compensation expenses incurred in the first quarter of 2006. Excluding these one-time compensation expenses, pre-tax earnings for 2006 were $6.7 billion, up 43% from the prior year, and the pre-tax profit margin was 36.4%, compared to 34.8% in 2005. Refer to Note 1 to the Consolidated Financial Statements for further detail on the one-time compensation expenses. See Exhibit 99.1, filed with our 2007 Form 10-K, for a reconciliation of non-GAAP measures. GMI’s growth in net revenues and pre-tax earnings in 2006 were a result of increased revenues in FICC, Equity Markets and Investment Banking.
 
Fixed Income, Currencies and Commodities (FICC)
FICC net revenues include principal transactions and net interest profit (which we believe should be viewed in aggregate to assess trading results), commissions, revenues from principal investments, and other revenues.

         
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For 2007, FICC net revenues were negative $15.9 billion as strong revenues in global rates and global currencies were more than offset by declines in global credit and global structured finance and investments businesses, as discussed below. FICC’s 2007 net revenues include a net benefit of approximately $1.2 billion related to changes in our credit spreads on the carrying value of certain of our long-term liabilities.
 
During 2007, FICC was adversely impacted by the deterioration in the credit markets evidenced by lower levels of liquidity, reduced price transparency, increased volatility and a weaker U.S. housing market. The combination of these market conditions resulted in approximately $20.6 billion of net write-downs in 2007 related to our U.S. ABS CDOs, as well as our U.S. sub-prime residential mortgage-related assets including whole loans, warehouse lending, residual positions, residential mortgage-backed securities and sub-prime related securities held in our U.S. banks investment securities portfolio. FICC net revenues also included credit valuation adjustments related to our hedges with financial guarantors of negative $3.1 billion including negative $2.6 billion related to U.S. super senior ABS CDOs. These amounts reflect the write-down of our current exposure to a non-investment grade counterparty from which we had purchased hedges covering a range of asset classes including U.S. super senior ABS CDOs.
 
To a lesser extent, FICC net revenues were also impacted by write-downs related to our corporate and financial sponsor, non-investment grade lending commitments and write-downs related to commercial real estate exposures.
 
Partially offsetting these losses were strong performances in our global rates and global currencies businesses, which were up 77% and 36%, respectively, compared to the prior year. Our rates business benefited from strong client flow in interest rate swaps and options and was well positioned to take advantage of increases in both market and interest rate volatility. We also generated strong results from both the flow derivative and short-term interest rate trading businesses. Our global currencies business performed well in all regions, where we were well positioned to take advantage of favorable market conditions, increased volatility and increased client flow. Our global commodities business results were down 26% from the prior year due to limited trading opportunities in commodity markets.
 
In 2006, FICC net revenues of $7.6 billion increased 30% from 2005, as net revenues increased for all major products. The increases in net revenues were primarily driven by record year-over-year results in global commodities, global credit, global currencies, and global commercial real estate.
 
Equity Markets
Equity Markets net revenues include commissions, principal transaction revenues and net interest profit (which we believe should be viewed in aggregate to assess trading results), revenues from equity method investments, changes in fair value on private equity investments, and other revenues.
 
For 2007, Equity Markets net revenues were a record $8.3 billion, up 23% from the prior year period, driven by our equity-linked business which was up nearly 80%, global cash equity trading business which was up over 30% and global markets financing and services business, which includes prime brokerage, which was up over 45%. Results in our global cash equity trading business were driven by volume growth in our electronic trading business, which increased 90% over 2006. Equity prime broker balances increased over 50% from 2006. Our equity-linked business increased over 2006 due to client related activities in structured products and index options. These increases in Equity Markets net revenues for the year more than offset a year-over-year decline in net revenues from our global private equity business of $1.2 billion, driven primarily by the decline in the value of our publicly traded investments. Equity Markets 2007 net revenues include a gain of approximately $700 million related to changes in the carrying value of certain of our long-term liabilities.
 
Equity Markets net revenues in 2006 of $6.7 billion increased 54% from 2005 with positive results across every major line of business. The increase in revenues was primarily driven by global private equity, the strategic risk group, global equity-linked trading and the global markets equity financing and services business, which includes prime brokerage.
 
Investment Banking
For 2007, Investment Banking net revenues were a record $4.9 billion, up 22% from the prior-year period. The increases in strategic advisory services and equity origination, more than offset a decline in debt origination revenues.
 
Origination
Origination revenues represent fees earned from the underwriting of debt, equity and equity-linked securities as well as loan syndication fees.
 
For 2007, origination revenues were $3.2 billion, up 9% from 2006. Equity origination revenues were up 34% compared with 2006, while debt origination revenues were down 9%. The increase in revenues for equity origination compared to the prior-year period was primarily related to an increase in deal volume for the first half of 2007, partially offset by the industry-wide slowdown in activity during the second half of 2007. Debt origination experienced similar trends with deal volume increasing for the first half of 2007, while the industry-wide slowdown in activity during the second half of 2007 more than offset the increases in the first half of the year.

         
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In 2007 we purchased approximately $3 billion of perpetual convertible preferred shares issued by a key client, in a non-strategic capital markets transaction that enabled the client to raise funds to retire a previously issued series of preferred stock. We intend to hold this investment for a substantial period of time and to utilize appropriate risk management techniques to limit the impact of the change in value of the securities on our financial position and results of operations. The revenues associated with this transaction have been included in GMI’s equity origination and equity markets businesses and recorded in principal transactions in the accompanying Consolidated Statement of (Loss)/Earnings for the year ended December 28, 2007.
 
Origination revenues in 2006 were $2.9 billion, up 23% from 2005, driven by increased overall origination activity and our improved market share during 2006. Debt origination revenues set a new record at $1.7 billion, increasing 20% from 2005.
 
Strategic Advisory Services
The firm’s 2007 strategic advisory services revenues, which include merger and acquisition and other advisory fees, increased 58% from the year-ago period, to $1.7 billion, on increased overall deal volume as well as an increase in our share of completed merger and acquisition volume. Revenues for the year included our role as sole advisor to the consortium including The Royal Bank of Scotland, Fortis and Banco Santander on their acquisition of ABN AMRO.
 
Strategic advisory services revenues were $1.1 billion in 2006, up 25% from 2005 on increased transaction volumes.
 
For additional information on GMI’s segment results, refer to Note 2 to the Consolidated Financial Statements.
 
Global Wealth Management
GWM, our full-service retail wealth management segment, provides brokerage, investment advisory and financial planning services, offering a broad range of both proprietary and third-party wealth management products and services globally to individuals, small- to mid-size businesses, and employee benefit plans. GWM is comprised of GPC and GIM.
 
GPC provides a full range of wealth management products and services to assist clients in managing all aspects of their financial profile through the Total Merrill| platform. Total Merrill| is the platform for GPC’s core strategy offering investment choices, brokerage, advice, planning and/or performance analysis to its clients. GPC’s offerings include commission and fee-based investment accounts; banking, cash management, and credit services, including consumer and small business lending and Visa® cards; trust and generational planning; retirement services; and insurance products. GPC services individuals and small- and middle-market corporations and institutions through approximately 16,740 FAs and 200 First Republic relationship managers in 735 offices around the world as of December 28, 2007.
 
GIM includes our interests in creating and managing wealth management products, including alternative investment products for clients. GIM also includes our share of net earnings from our ownership positions in other investment management companies, including BlackRock.
 
Global Private Client
 
Investment Brokerage and Advisory Services
We provide comprehensive brokerage and advisory financial services in the United States to GPC clients principally through our FA network. Outside the United States, we provide comprehensive brokerage and investment services and related products through a network of offices located in 35 countries. We also offer banking and trust services, as well as investment management services, to our clients in many countries.
 
To be more responsive to our clients’ needs and to enhance the quality of our clients’ experience, GPC offers a multi-channel service model that more closely aligns our FAs with clients based on levels of investable assets. The FAs focus primarily on clients with more than $100,000, but less than $10 million of investable assets. Private Wealth Advisors who have completed a rigorous accreditation program focus primarily on clients with more than $10 million of investable assets. GPC’s Financial Advisory Center, a team-based service platform with client access by telephone and internet, is focused primarily on U.S. clients with less than $100,000 of investable assets. GPC also uses International Financial Advisory Centers to more effectively serve non-U.S. clients with lower levels of investable assets.
 
To help align products and services to each client’s specific investment requirements and goals, GPC offers a choice of traditional commission-based investment accounts, a variety of asset-priced investment advisory services and self-directed online accounts. Assets in GPC accounts totaled $1.75 trillion at December 28, 2007, an 8% increase from December 29, 2006, due primarily to net new money and market appreciation.
 
Individual clients access the full range of GPC brokerage and advisory services through the Cash Management Account® (“CMA®”), a product that combines investment and cash management transactions, as well as Visa® cards, check writing and ATM access. At the end of 2007, there were approximately 2.3 million CMA® accounts with aggregate assets of approximately $809 billion. Small- and medium-

         
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sized businesses obtain a wide range of securities account and cash management services through the Working Capital Management Account® (“WCMA account”) and related services. The WCMA account combines business checking, investment and electronic funds transfer services into one account for participating business clients. At the end of 2007, there were approximately 115,400 WCMA accounts with aggregate assets of more than $126 billion.
 
GPC provides electronic brokerage services through Merrill Lynch Direct®, an internet-based brokerage service for U.S. clients preferring a self-directed approach to investing. Merrill Lynch Direct® offers trading of equities, mutual funds and select fixed income securities, access to our proprietary research as well as other research, and a variety of online investing tools.
 
Banking, Trust and Insurance Services
GPC clients place deposits in our banking entities which are used for lending and investment activities. GPC also has a number of different business lines including residential mortgage financing, small and mid-size business lending and securities-based lending. GPC also sells life insurance and annuity products and provides personal trust, employee benefit trust and custodial services for its clients. These activities are conducted through our various bank, life insurance agency and trust subsidiaries and are more fully described in the Activities of Principal Subsidiaries section.
 
Retirement Services
The Merrill Lynch Retirement Group is responsible for approximately $442 billion in retirement assets for approximately 6.5 million individuals. This group provides a wide variety of investment and custodial services to individuals in the United States through Individual Retirement Accounts (“IRAs”) or through one of approximately 39,000 workplace-based retirement programs serviced by the group. We also provide investment, administration, communications and consulting services to corporations and their employees for their retirement programs. These programs include equity award and executive services, 401(k), pension, profit-sharing and non-qualified deferred compensation plans, as well as other retirement benefit plans. In addition, we offer Merrill Lynch Advice Access®, an investment advisory service for individuals in retirement plans that provides plan participants with the option of obtaining advice through their local FA, an advisor at the Financial Advisory Center or through our Benefits Online® website.
 
Global Investment Management
GIM creates and manages various investment products for clients. GIM’s results include revenues derived from those activities, as well as our share of earnings from our ownership positions in other investment management companies, including our investment in BlackRock.
 
Alternative Investments
Through its alternative investments business, GIM creates and manages a broad array of alternative investment choices for clients. Unlike traditional investments such as mutual funds, whose performance is largely dependent on the direction of the broader market, many alternative investment strategies seek positive returns in any market or economic environment. Our alternative investments business offers a range of investment choices, including offering qualified high-net-worth clients access to a wide range of hedge fund strategies.
 
BlackRock
We own a 45% voting interest and approximately half of the economic interest of BlackRock, which is one of the world’s largest publicly traded investment management firms with approximately $1.4 trillion in assets under management at the end of 2007. BlackRock manages assets on behalf of institutions and individuals worldwide through a variety of equity, fixed income, cash management, and alternative investment products.
 
GWM’s 2007 Developments
GWM continued to focus on growth initiatives during 2007, driving operating leverage through a strategy of revenue and product diversification, annuitization, client segmentation, growth in client assets, the hiring of additional FAs, and investments to improve productivity. Approximately 860 FAs were added during 2007, and productivity per FA increased over 2006. The growth in FAs came through recruiting efforts and the continued low rate of turnover among our most productive FAs. GWM continues to make investments to carefully expand both within and outside the United States, where we believe substantial opportunity for growth exists in a number of markets.
 
On September 21, 2007, we acquired all of the outstanding common shares of First Republic in exchange for a combination of cash and stock for a total transaction value of $1.8 billion. First Republic, which now operates as a division of Merrill Lynch Bank & Trust Co. FSB, provides personalized, relationship-based banking services, including private banking, private business banking, real estate lending, trust, brokerage and investment management. The results of operations of First Republic have been included in GWM since the transaction closed. Refer to Note 16 to the Consolidated Financial Statements for additional information.
 
On December 28, 2007, we sold MLIG to AEGON for $1.3 billion, which resulted in an after-tax gain of $316 million in discontinued operations. We will maintain a strategic business relationship with AEGON in the areas of insurance and investment products, and will

         
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continue to serve the insurance needs of our clients through our core distribution and advisory capabilities. We have included results for MLIG within discontinued operations for all periods presented. We previously reported the results of MLIG in the GWM business segment. Refer to Note 17 to the Consolidated Financial Statements for additional information.
 
GWM Results of Operations
                                         
                      % CHANGE  
                      2007 VS.
    2006 VS.
 
(DOLLARS IN MILLIONS)   2007     2006     2005     2006     2005  
GPC
                                       
Fee-based revenues
  $ 6,278     $ 5,499     $ 4,743       14 %     16 %
Transactional and origination revenues
    3,887       3,397       3,264       14       4  
Net interest profit and related hedges(1)
    2,318       2,103       1,763       10       19  
Other revenues
    416       301       310       38       (3 )
                                         
Total GPC revenues, net of interest expense
    12,899       11,300       10,080       14       12  
                                         
GIM
                                       
Total GIM revenues, net of interest expense
    1,122       541       409       107       32  
                                         
Total GWM revenues, net of interest expense
    14,021       11,841       10,489       18       13  
                                         
Non-interest expenses before one-time
compensation expenses
    10,391       9,270       8,422       12       10  
One-time compensation expenses
          281             N/M       N/M  
                                         
Pre-tax earnings from continuing operations
  $ 3,630     $ 2,290     $ 2,067       59       11  
                                         
                                         
Pre-tax profit margin
    25.9 %     19.3 %     19.7 %                
Total full-time employees
    31,000       28,400       26,900                  
Total Financial Advisors
    16,740       15,880       15,160                  
                                         
                                         
N/M = Not Meaningful
(1) Includes interest component of non-qualifying derivatives which are included in other revenues on the Consolidated Statements of (Loss)/Earnings.
 
GWM’s net revenues in 2007 were $14.0 billion, an increase of 18% over the prior year, reflecting strong growth in both GPC and GIM’s businesses. GWM generated $3.6 billion of pre-tax earnings from continuing operations, up 59% from the prior year. The pre-tax profit margin was 25.9% in 2007, compared with 19.3% in the prior year. Our share of the after-tax earnings of BlackRock is included in the GIM portion of GWM revenues for the full year of 2007, but for only the fourth quarter of 2006, as the BlackRock merger occurred on September 29, 2006.
 
GWM’s net revenues in 2006 were $11.8 billion, an increase of 13% over 2005, reflecting strong growth in both GPC and GIM’s businesses, as well as the inclusion of our share of fourth quarter 2006 after-tax earnings of BlackRock. Pre-tax earnings were up 11% to $2.3 billion.
 
Assets in annuitized-revenue products at year-end 2007 were $655 billion, up 7% from 2006, driven by both market appreciation and net inflows. Total client assets in GWM accounts ended the year at $1.75 trillion. Total net new money was $80 billion in 2007, up 33% from 2006. This was the highest full year net new money inflow in over six years and included higher than normal inflows into money funds and other low risk asset classes, consistent with clients seeking to reduce their risk exposure during the difficult second half of the year. GWM’s net inflows of client assets into annuitized-revenue products were $38 billion in 2007, down 21% from 2006 due to regulatory changes that resulted in our decision to no longer offer fee-based brokerage accounts.
 
In March 2007, the U.S. Court of Appeals for the District of Columbia Circuit held that the SEC exceeded its rulemaking authority with respect to Rule 202(a)(11)-1 of the Investment Advisers Act of 1940 (the “Fee-Based Rule”). The Fee-Based Rule generally exempted certain broker-dealers from the requirement to register as investment advisers under the Advisers Act with respect to the offering of fee-based brokerage services. In its decision, the court overturned the Fee-Based Rule in its entirety. During the third quarter of 2007, after review of this decision with representatives of the SEC, we informed clients of our decision to no longer offer our Merrill Lynch Unlimited Advantage® (“MLUA”) account, and our Financial Advisors worked with MLUA clients to transfer their assets to an alternative account platform. During the fourth quarter of 2007, more than $100 billion of client assets were transitioned from MLUA accounts into other account platforms with approximately 75% transitioning into other fee-based accounts. While the remaining 25% of client assets migrated to traditional commission-based accounts, virtually no client assets were transferred outside of Merrill Lynch. Excluding the impact of the MLUA transition, net new money into annuitized-revenue products would have been over $20 billion higher in 2007. While this decision affected certain of our service offerings to certain clients, we do not expect it to have a material impact on our future financial results.
 
Global Private Client
GPC generated record net revenues of $12.9 billion in 2007, up 14% from the prior year, as revenues increased in every major revenue category. GPC’s net revenues were $11.3 billion in 2006, up 12% from the prior year. Both 2007 and 2006 increases in net revenues were

         
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due to higher asset values and strong flows into fee-based products, as well as higher net interest profit and transactional and origination revenues.
 
In 2007, GPC added a net of 860 FAs, driven by continued retention of current FAs and recruitment of new FAs, as GPC continued to successfully execute its strategy for recruiting and training high-quality FAs.
 
A detailed discussion of GPC’s revenues follows:
 
Fee-Based Revenues
Fee-based revenues primarily consist of portfolio service fees that are derived from accounts that charge an annual fee based on net asset value (generally billed quarterly in advance based on prior quarter asset values), such as Merrill Lynch Consults® (a separately managed account product) and prior to 2007 year-end, Unlimited Advantage® (a fee-based brokerage account). Fee-based revenues also include commissions related to distribution fees on mutual funds, asset-based commissions from insurance products and taxable and tax-exempt money market funds, and fixed annual account fees and other account-related fees (these commissions are included in commissions revenues on the Consolidated Statements of (Loss)/Earnings).
 
GPC generated a record $6.3 billion of fee-based revenues in 2007, up 14% from 2006. In 2006, fee-based revenues totaled $5.5 billion, up 16% from 2005. Both 2007 and 2006 increases in fee-based revenues were due to higher market values and strong flows into annuitized-revenue products.
 
The value of client assets in GWM accounts at year-end 2007, 2006 and 2005 follows:
 
                   
(DOLLARS IN BILLIONS)   2007   2006   2005
Assets in client accounts:
                 
U.S
  $ 1,586   $ 1,483   $ 1,341
Non-U.S.
    165     136     117
                   
Total
  $ 1,751   $ 1,619   $ 1,458
                   
                   
Assets in Annuitized-Revenue Products
  $ 655   $ 611   $ 528
                   
                   
 
Transactional and Origination Revenues
Transactional and origination revenues include certain commission revenues, such as those that arise from agency transactions in listed and OTC equity securities, mutual funds, and insurance products. These revenues also include principal transactions which primarily represent bid-offer revenues on government bonds and municipal securities, as well as new issue revenues which include selling concessions on newly issued debt and equity securities, including shares of closed-end funds.
 
Transactional and origination revenues were $3.9 billion in 2007, up 14% from 2006, primarily due to higher client transaction volumes in secondary markets, particularly outside the United States, as well as growth in origination activity across all products. In addition, transactional and origination revenues included $168 million related to the termination of various agreements under which we were no longer obligated to provide future support and informational services related to origination activities.
 
Transactional and origination revenues were $3.4 billion in 2006, up 4% from the prior year with increases in both transaction-related revenues and origination revenues.
 
Net Interest Profit and Related Hedges
Net interest profit (interest revenues less interest expenses) and related hedges include GPC’s allocation of the interest spread earned in our banking subsidiaries for deposits, as well as interest earned, net of provisions for loan losses, on securities-based loans, mortgages, small- and middle-market business and other loans, corporate funding allocations, and the interest component of non-qualifying derivatives.
 
GPC’s net interest profit and related hedges were $2.3 billion in 2007, up 10% from 2006, primarily due to higher net interest revenue from deposits and additional interest from First Republic since the date of acquisition on September 21, 2007. GPC’s net interest profit and related hedges were $2.1 billion in 2006, up 19% from 2005. The 2006 increase primarily reflected higher margins on deposits resulting from rising short-term interest rates and lower provisions for loan losses associated with the small- and middle-market business loan portfolio.
 
Other Revenues
GPC’s other revenues were $416 million in 2007, up 38% from 2006, primarily due to additional revenues from the distribution of mutual funds and foreign exchange gains.
 
GPC’s other revenues were $301 million in 2006, down 3% from 2005, due in part to lower mortgage-related revenues.

         
Merrill Lynch 2007 Annual Report   page 46    


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Global Investment Management
GIM includes revenues from the creation and management of hedge fund and other alternative investment products for clients, as well as our share of net earnings from our ownership positions in other investment management companies, including BlackRock. Under the equity method of accounting, an estimate of the net earnings associated with our approximately 50% ownership interest in BlackRock is recorded in the GIM portion of the GWM segment.
 
GIM’s 2007 revenues of $1.1 billion were up 107% from 2006, driven by the inclusion of revenues for a full year from our investment in BlackRock, and to a lesser extent increases in revenues from our investments in other alternative asset management companies. GIM’s 2006 revenues of $541 million were up 32% from 2005, primarily due to the inclusion of revenues from our ownership position in BlackRock, as well as growth in revenues from our investments in other alternative asset management companies.
 
Merrill Lynch Investment Managers
On September 29, 2006, we merged MLIM with BlackRock in exchange for a total of 65 million common and preferred shares in the newly combined BlackRock, representing an economic interest of approximately half. Following the merger, the MLIM business segment ceased to exist, and under the equity method of accounting, an estimate of the net earnings associated with our ownership position in BlackRock is recorded in the GIM portion of the GWM segment.
                         
                % CHANGE  
                2006 VS.
 
(DOLLARS IN MILLIONS)   2006 (1)   2005     2005  
MLIM
                       
Asset management fees
  $ 1,560     $ 1,573       (1 )%
Commissions
    83       105       (21 )
Other revenues
    257       129       99  
                         
Total MLIM net revenues, net of interest expense
    1,900       1,807       5  
                         
Non-interest expenses before one-time compensation expenses
    1,154       1,221       (5 )
One-time compensation expenses
    109             N/M  
                         
Pre-tax earnings from continuing operations
  $ 637     $ 586       9  
                         
                         
Pre-tax profit margin
    33.5 %     32.4 %        
Total full-time employees
          2,600          
                         
                         
N/M = Not Meaningful
(1) 2006 results include only nine months of operations prior to the BlackRock merger at the end of the third quarter of 2006.
 
MLIM’s net revenues for 2006, reflecting only nine months of operations, increased 5% over those for the full year 2005, to $1.9 billion, driven by strong net sales and asset appreciation. Pre-tax earnings of $637 million, reflecting only nine months of operations, and pre-tax profit margin of 33.5% included $109 million in one-time compensation expenses incurred in 2006. Excluding these one-time compensation expenses, pre-tax earnings were $746 million, increasing 27% over the prior year, and the pre-tax profit margin was 39.3%, up nearly 7 percentage points from 32.4% in 2005. Refer to Note 1 to the Consolidated Financial Statements for further detail on the one-time compensation expenses. See Exhibit 99.1, filed with our 2007 Form 10-K, for a reconciliation of non-GAAP measures.
 
Asset Management Fees
Asset management fees primarily consisted of fees earned from the management and administration of retail mutual funds and separately managed accounts for retail investors, as well as institutional funds such as pension assets. Asset management fees also included performance fees, which are generated in some cases by separately managed accounts and institutional money management arrangements.
 
Asset management fees for the first nine months of 2006 were $1.6 billion, down slightly from the full year revenues in 2005, but up 37% from the first nine months of 2005, driven by strong net sales and asset appreciation.
 
Commissions
Commissions for MLIM principally consisted of distribution fees and contingent deferred sales charges (“CDSC”) related to mutual funds. The distribution fees represented revenues earned for promoting and distributing mutual funds, and the CDSC represented fees earned when a shareholder redeemed shares prior to the required holding period. Commission revenues were $83 million for the first nine months of 2006, down 21% from the full year of 2005, but up 5% from the first nine months of 2005.
 
Other Revenues
Other revenues primarily included net interest profit, investment gains and losses and revenues from consolidated investments. Other revenues totaled $257 million for the first nine months of 2006, up from $129 million for the full year of 2005 reflecting increased investment gains from consolidated investments.

         
    page 47   (Bull Graphic)


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   Geographic Information
Our operations are organized into five regions which include: the United States; Europe, Middle East, and Africa (“EMEA”); Pacific Rim; Latin America; and Canada. Revenues and expenses are generally recorded based on the location of the employee generating the revenue or incurring the expense without regard to legal entity. The information that follows, in management’s judgment, provides a reasonable representation of each region’s contribution to the consolidated net revenues:
                                     
                  % CHANGE  
                  2007 VS.
    2006 VS.
 
(DOLLARS IN MILLIONS)   2007     2006 (1) 2005   2006     2005  
Revenues, net of interest expense
                                   
Europe, Middle East, and Africa (EMEA)
  $ 5,973     $ 6,896   $ 4,755     (13 )%     45 %
Pacific Rim
    5,065       3,703     2,692     37       38  
Latin America
    1,401       1,009     841     39       20  
Canada
    430       386     228     11       69  
                                     
Total Non-US
    12,869       11,994     8,516     7       41  
United States(2)(3)(4)
    (1,619 )     21,787     16,761     N/M       30  
                                     
Total
  $ 11,250     $ 33,781   $ 25,277     (67 )     34  
                                     
                                     
N/M = Not Meaningful
(1) 2006 results include net revenues earned by MLIM of $1.9 billion, which include non-U.S. net revenues of $1.0 billion. 2005 results include net revenues earned by MLIM of $1.8 billion, which include non-U.S. net revenues of $0.8 billion.
(2) Corporate net revenues and adjustments are reflected in the U.S. region.
(3) 2006 U.S. net revenues include a gain of approximately $2.0 billion, resulting from the closing of the BlackRock merger.
(4) 2007 U.S. net revenues include write-downs of $23.2 billion related to U.S. ABS CDOs, U.S. sub-prime residential mortgages and securities, and credit valuation adjustments related to hedges with financial guarantors on U.S. ABS CDOs.
 
Non-U.S. net revenues for 2007 increased to a record $12.9 billion, up 7% from 2006. This increase was mainly attributable to higher net revenues generated from the Pacific Rim and Latin America regions, partially offset by a decrease in EMEA. Growth in non-U.S. net revenues was generated across all major businesses in 2007. For GMI, non-U.S. net revenues increased 16% from the prior year. For GWM, non-U.S. net revenues increased 24% from 2006 and represented 11% of the total GWM net revenues.
 
Net revenues in EMEA were $6.0 billion in 2007, a decrease of 13% from 2006, which included MLIM net revenues of approximately $775 million. The decrease from the prior year was also driven by lower net revenues from GMI, mainly within FICC. Within our FICC business, we experienced lower net revenues primarily driven by our structured finance and commercial real estate businesses. In addition, net revenues from our private equity business declined in 2007 by approximately $400 million compared to 2006. These decreases were partially offset by higher net revenues in our Equity Markets business reflecting strong performances from equity-linked, financing and services (which includes prime brokerage), and cash equities trading activities. Investment Banking net revenues increased from a year ago as increases from our strategic advisory services and equity origination activities more than offset declines in our debt origination.
 
Net revenues in EMEA were $6.9 billion in 2006, up 45% from 2005. This increase resulted from higher net revenues throughout GMI businesses. Within FICC, higher net revenues were driven by increases from commodities, credit related and structured finance activities, while Equity Markets’ strong results reflected increases from equity-linked and cash equities trading activities. Private equity net revenues increased over $200 million in 2006 compared to 2005. Investment Banking net revenues were higher across all areas with the strongest increase generated from debt origination.
 
Net revenues in the Pacific Rim were $5.1 billion in 2007, an increase of 37% from 2006. These results reflected increases across multiple businesses and products within GMI and GWM. Within GMI, higher net revenues in Equity Markets were driven by our equity-linked and cash equities trading activities, while higher net revenues in FICC were primarily driven by commercial real estate. GWM net revenues rose 27% to over $500 million in 2007.
 
Net revenues in the Pacific Rim were $3.7 billion in 2006, an increase of 38% from 2005, mainly reflecting growth across GMI businesses. In FICC, higher net revenues primarily reflected increases from our commercial real estate business as well as our rates and currency trading activities. Increased net revenues in Equity Markets were driven by cash equities trading activities and increased net revenues from our private equity business. Investment Banking net revenues increased across all activities with the most significant increase generated from equity origination.
 
Net revenues in Latin America increased 39% in 2007, reflecting strong results in both our GMI and GWM businesses. In GMI, all businesses generated higher net revenues with the most significant increases resulting from FICC credit and currency trading activities.
 
Net revenues in Canada increased 11% in 2007, due to strong results in our GMI businesses.
 
U.S. net revenues were negative $1.6 billion in 2007, down from $21.8 billion in 2006, which included a $2.0 billion gain related to the BlackRock merger and approximately $900 million of net revenues from MLIM. The decreases were mainly driven by lower net revenues

         
Merrill Lynch 2007 Annual Report   page 48    


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in GMI, primarily within our FICC business. See the FICC results of operations section for further information. In Equity Markets net revenues increased in 2007 driven by increased gains of approximately $700 million arising from the widening of Merrill Lynch credit spreads on certain of our long-term liabilities and increases from equity-linked, financing and servicing and cash equities trading. Investment Banking net revenues increased year-over-year as strong strategic advisory and equity origination activities offset lower net revenues from debt origination, primarily leveraged finance. The overall decline in GMI net revenues was partially offset by strong results from our GWM business, which generated net revenues of $12.3 billion, an increase of 19% from 2006.
 
In 2006, U.S. net revenues were $21.8 billion, which included the one-time gain arising from the merger of MLIM with BlackRock, increased 30% compared to 2005 reflecting increases across all GMI businesses and GWM. Equity Markets strong results in 2006 reflected increased net revenues from our private equity business and equity-linked trading activities. Investment Banking higher net revenues in 2006 reflected increases across all businesses, while FICC’s increased net revenues in 2006 were driven by credit trading activities. GWM generated net revenues of $10.4 billion in 2006, an increase of 14% from 2005.
 
   Consolidated Balance Sheets
We continuously monitor and evaluate the size and composition of the Consolidated Balance Sheet. The following table summarizes the year-end and average balance sheets for 2007 and 2006:
                           
    DEC. 28,
  2007
  DEC. 29,
  2006
 
(DOLLARS IN MILLIONS)   2007   AVERAGE (1) 2006   AVERAGE (1)
Assets
                         
Trading-Related
                         
Securities financing assets
  $ 400,002   $ 490,729   $ 321,907   $ 362,090  
Trading assets
    234,669     254,421     203,848     193,911  
Other trading-related receivables
    95,753     93,556     71,621     69,510  
                           
      730,424     838,706     597,376     625,511  
                           
Non-Trading-Related
                         
Cash
    64,345     54,068     45,558     37,760  
Investment securities
    82,532     85,982     83,410     70,827  
Loans, notes, and mortgages, net
    94,992     81,704     73,029     70,992  
Other non-trading assets
    47,757     52,150     41,926     43,012  
                           
      289,626     273,904     243,923     222,591  
                           
Total assets
  $ 1,020,050   $ 1,112,610   $ 841,299   $ 848,102  
                           
                           
Liabilities
                         
Trading-Related
                         
Securities financing liabilities
  $ 336,876   $ 459,827   $ 291,045   $ 332,741  
Trading liabilities
    123,588     146,073     98,862     117,873  
Other trading-related payables
    91,550     107,198     75,622     80,238  
                           
      552,014     713,098     465,529     530,852  
                           
Non-Trading-Related
                         
Short-term borrowings
    24,914     20,231     18,110     17,104  
Deposits
    103,987     88,319     84,124     81,109  
Long-term borrowings
    260,973     211,118     181,400     141,278  
Junior subordinated notes (related to trust preferred securities)
    5,154     4,263     3,813     3,091  
Other non-trading liabilities
    41,076     36,180     49,285     37,251  
                           
      436,104     360,111     336,732     279,833  
                           
Total liabilities
    988,118     1,073,209     802,261     810,685  
                           
Total stockholders’ equity
    31,932     39,401     39,038     37,417  
                           
Total liabilities and stockholders’ equity
  $ 1,020,050   $ 1,112,610   $ 841,299   $ 848,102  
                           
                           
(1) Averages represent our daily balance sheet estimates, which may not fully reflect netting and other adjustments included in period-end balances. Balances for certain assets and liabilities are not revised on a daily basis.
 
The increases in trading-related assets and liabilities as of December 28, 2007, when compared to December 29, 2006, primarily reflect higher levels of securities financing activity, which includes increased client matched-book transactions. We continued to expand our prime brokerage business during the year, which resulted in increases in securities financing transactions.
 
The increase in non-trading related assets as of December 28, 2007, when compared to December 29, 2006, primarily relates to an increase in loans, notes, and mortgages and cash. The increase in loans, notes, and mortgages primarily relates to the origination of commercial loans, and to a lesser extent, residential mortgages, which included loans associated with our First Republic acquisition.

         
    page 49   (Bull Graphic)


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The increase in cash is primarily driven by issuances of long-term borrowings. See the Cash Flows section in our MD&A for further details on changes in cash. Non-trading related liabilities were higher as of December 28, 2007, when compared to December 29, 2006, primarily due to increases in long-term borrowings and deposits to maintain sufficient funding to support our businesses and ensure adequate liquidity.
 
Stockholders’ equity at December 28, 2007 was $31.9 billion, down 18% from $39.0 billion at December 29, 2006. This decrease primarily resulted from our net loss from continuing operations, common stock repurchases, and dividends paid, which were partially offset by common and preferred stock issuances and the net effect of employee stock transactions.
 
See Note 1 to the Consolidated Financial Statements for further information on balance sheet captions.
 
   Off-Balance Sheet Exposures
As a part of our normal operations, we enter into various off balance sheet arrangements that may require future payments. The table below outlines the significant off balance sheet arrangements, as well as the future expirations as of December 28, 2007:
 
                               
    EXPIRATION
        LESS THAN
  1–3
  3+–5
  OVER 5
(DOLLARS IN MILLIONS)   TOTAL   1 YEAR   YEARS   YEARS   YEARS
Liquidity, credit and default facilities
  $ 43,669   $ 40,454   $ 3,143   $ 72   $
Residual value guarantees
    1,001     74     406     115     406
Standby letters of credit and other guarantees
    45,177     1,785     1,147     954     41,291
                               
                               
 
Liquidity, Credit and Default Facilities
We provide guarantees to special purpose entities (“SPEs”) in the form of liquidity, credit and default facilities. The liquidity, credit and default facilities relate primarily to municipal bond securitization SPEs, whose assets are comprised of municipal bonds, and an asset-backed commercial paper conduit, whose assets primarily include auto and equipment loans and lease receivables. To protect against declines in value of the assets held by the SPEs for which we provide liquidity, credit or default facilities, we may economically hedge our exposure through derivative positions that principally offset the risk of loss of these facilities. See Notes 6 and 11 to the Consolidated Financial Statements for further information.
 
Residual Value Guarantees
Residual value guarantees are primarily related to leasing SPEs where either we or a third-party is the lessee, and includes residual value guarantees associated with the Hopewell campus and aircraft leases of $322 million. At December 28, 2007 a liability of $13 million was recorded on the Consolidated Balance Sheet for these guarantees.
 
Standby Letters of Credit
We also make guarantees to counterparties in the form of standby letters of credit and reimbursement agreements issued in conjunction with sales of loans originated under our Mortgage 100| program. At December 28, 2007, we held $593 million of marketable securities as collateral to secure these guarantees and a liability of $12 million was recorded on the Consolidated Balance Sheet.
 
Other Guarantees
In conjunction with certain structured investment funds, we guarantee the return of the initial principal investment at the termination date of the fund. These funds are generally managed based on a formula that requires the fund to hold a combination of general investments and highly liquid risk-free assets that, when combined, will result in the return of principal at the maturity date unless there is a significant market event. At December 28, 2007 a liability of $7 million was recorded on the Consolidated Balance Sheet for these guarantees.
 
We also provide indemnifications related to the U.S. tax treatment of certain foreign tax planning transactions. The maximum exposure to loss associated with these transactions is $167 million; however, we believe that the likelihood of loss with respect to these arrangements is remote. At December 28, 2007 no liabilities were recorded on the Consolidated Balance Sheet for these guarantees.
 
In connection with residential mortgage loan and other securitization transactions, Merrill Lynch typically makes representations and warranties about the underlying assets. If there is a material breach of such representations and warranties, Merrill Lynch may have an obligation to repurchase the assets or indemnify the purchaser against any loss. For residential mortgage loan and other securitizations, the maximum potential amount that could be required to be repurchased is the current outstanding asset balance. Specifically related to First Franklin activities, there is currently approximately $40 billion of outstanding loans that First Franklin sold in various asset sales and securitization transactions over the last 36 months. Merrill Lynch has recognized a liability of approximately $520 million at December 28, 2007 arising from these residential mortgage sales and securitization transactions.

         
Merrill Lynch 2007 Annual Report   page 50    


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Derivatives
Merrill Lynch records all derivative transactions at fair value on its Consolidated Balance Sheets. Merrill Lynch does not monitor its exposure to derivatives based on the theoretical maximum payout because that measure does not take into consideration the probability of the occurrence. Additionally, the notional value is not a relevant indicator of Merrill Lynch’s exposure to these contracts, as it is not indicative of the amount that will be owed on the contract. Instead, a risk framework is used to define risk tolerances and establish limits to help to ensure that certain risk-related losses occur within acceptable, predefined limits. Since derivatives are recorded on the Consolidated Balance Sheets at fair value and the disclosure of the notional amounts is not a relevant indicator of risk, notional amounts are not provided for the off-balance sheet exposure on derivatives. Derivatives that meet the definition of a guarantee under FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indebtedness of Others, are included in Note 11 to the Consolidated Financial Statements.
 
We also fund selected assets, including CDOs and CLOs, via derivative contracts with third party structures that are not consolidated on our balance sheets. Of the total notional amount of these total return swaps, approximately $24 billion is term financed through facilities provided by commercial banks, $35 billion of long term funding is provided by third party special purpose vehicles and $11 billion is financed with asset backed commercial paper conduits. In certain circumstances, we may be required to purchase these assets which would not result in additional gain or loss to us as such exposure is already reflected in the fair value of our derivative contracts.
 
In order to facilitate client demand for structured credit products, we sell protection on high grade collateral and buy protection on lesser grade collateral to certain SPEs which then issue structured credit notes.
 
Acting in our market making capacity, we enter into other derivatives with SPEs, both Merrill Lynch sponsored and third party, including interest rate swaps, credit default swaps and other derivative instruments.
 
Involvement with SPEs
Merrill Lynch transacts with SPEs in a variety of capacities, including those that we help establish as well as those for which we are not involved in the initial formation. Merrill Lynch’s involvement with SPEs can vary and, depending upon the accounting definition of the SPE (i.e., voting rights entity (“VRE”), VIE or QSPE), we may be required to reassess whether our involvement necessitates consolidating the SPE or disclosing a significant involvement with the SPE. An interest in a VRE requires reconsideration when our equity interest or management influence changes, an interest in a VIE requires reconsideration when an event occurs that was not originally contemplated (e.g., a purchase of the SPE’s assets or liabilities), and an interest in a QSPE requires reconsideration if the entity no longer meets the definition of a QSPE. Refer to Note 1 to the Consolidated Financial Statements for a discussion of our consolidation accounting policies. Types of SPEs include:
 
•  Municipal bond securitization SPEs: SPEs that issue medium-term paper, purchase municipal bonds as collateral and purchase a guarantee to enhance the creditworthiness of the collateral.
 
•  Asset-backed securities SPEs: SPEs that issue different classes of debt, from super senior to subordinated, and equity and purchase assets as collateral, including residential mortgages, commercial mortgages, auto leases and credit card receiveables.
 
•  ABS CDOs: SPEs that issue different classes of debt, from super senior to subordinated, and equity and purchase asset-backed securities collateralized by residential mortgages, commercial mortgages, auto leases and credit card receivables.
 
•  Synthetic CDOs: SPEs that issue different classes of debt, from super senior to subordinated, and equity, purchase high grade assets as collateral and enter into a portfolio of credit default swaps to synthetically create the credit risk of the issued notes.
 
•  Credit-linked note SPEs: SPEs that issue notes linked to the credit risk of a company, purchase high grade assets as collateral and enter into credit default swaps to synthetically create the credit risk to pay the return on the notes.
 
•  Tax planning SPEs: SPEs are sometimes used to legally isolate transactions for the purpose of deriving certain tax benefits on behalf of our clients as well as ourselves. The assets and capital structure of these entities vary for each structure.
 
•  Trust preferred security SPEs: These SPEs hold junior subordinated debt issued by Merrill Lynch, or our subsidiaries, and issue preferred stock on substantially the same terms to third party investors. We also provide a parent guarantee, on a junior subordinated basis, of the distributions and other payments on the preferred stock to the extent that the SPEs have funds legally available. The debt we issue into the SPE is classified as long-term borrowings on our Consolidated Balance Sheets. The ML & Co. parent guarantees of its own subsidiaries are not required to be recorded in the Consolidated Financial Statements.
 
•  Conduits: Generally, entities that issue commercial paper and subordinated capital, purchase assets, and enter into total return swaps or repurchase agreements with higher rated counterparties, particularly banks. The Conduits generally have a liquidity and/or credit facility to further enhance the credit quality of the commercial paper issuance. A single seller conduit will execute total return swaps, repurchase agreements, and liquidity and credit facilities with one financial institution. A multi-seller conduit will execute total return swaps, repurchase agreements, and liquidity and credit facilities with numerous financial institutions. Refer to Notes 6 and 11 to the Consolidated Financial Statements for additional information on Conduits.

         
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Our involvement with SPEs includes off-balance sheet arrangements discussed above, as well as the following activities:
 
Holder of Issued Debt and Equity
Particularly in SPEs that we establish, Merrill Lynch may be the holder of debt and equity of an SPE. These holdings will be classified as trading assets, loans, notes and mortgages or investment securities. Such holdings may change over time at the discretion of Merrill Lynch and rarely are there contractual obligations requiring us to purchase additional debt or equity interests. Significant obligations would be disclosed in the off balance sheet arrangements table above.
 
Warehousing of Loans and Securities
Warehouse loans and securities represent amounts maintained on our balance sheet that are intended to be sold into a trust for the purposes of securitization. We may retain amounts on our balance sheet for the benefit of a CDO managed by a third party. Warehoused loans are carried as held for sale and warehoused securities are carried as trading assets. We have significantly reduced the levels of activity and exposure to these holdings.
 
Securitizations
In the normal course of business, Merrill Lynch securitizes: commercial and residential mortgage loans and home equity loans; municipal, government, and corporate bonds; and other types of financial assets. Securitizations involve the selling of assets to SPEs, which in turn issue debt and equity securities (“tranches”) with those assets as collateral. Merrill Lynch may retain interests in the securitized financial assets through holding tranches of the securitization. See Note 6 to the Consolidated Financial Statements.
 
Structured Investment Vehicles (“SIVs”)
SIVs are leveraged investment programs that purchase securities and issue asset-backed commercial paper and medium-term notes. These SPEs are characterized by low equity levels with partial liquidity support facilities and the assets are actively managed by the SIV investment manager. Merrill Lynch has not been the sponsor or equity investor of any SIV. Merrill Lynch has acted as a commercial paper or medium-term note placement agent for various SIVs.
 
   Contractual Obligations and Commitments
 
   Contractual Obligations
In the normal course of business, we enter into various contractual obligations that may require future cash payments. The accompanying table summarizes our contractual obligations by remaining maturity at December 28, 2007. Excluded from this table are obligations recorded on the Consolidated Balance Sheets that are: (i) generally short-term in nature, including securities financing transactions, trading liabilities, derivative contracts, commercial paper and other short-term borrowings and other payables; and (ii) deposits.
 
                               
    EXPIRATION
        LESS THAN
  1–3
  3+–5
  OVER 5
(DOLLARS IN MILLIONS)   TOTAL   1 YEAR   YEARS   YEARS   YEARS
Long-term borrowings
  $ 260,973   $ 65,040   $ 69,881   $ 43,566   $ 82,486
Contractual interest payments(1)
    54,244     8,509     11,302     7,788     26,645
Purchasing and other commitments
    8,142     4,035     1,177     1,242     1,688
Junior subordinated notes (related to trust preferred securities)
    5,154                 5,154
Operating lease commitments
    3,901     618     1,173     949     1,161
                               
                               
(1) Relates to estimates of future interest payments associated with long-term borrowings based upon applicable interest rates as of December 28, 2007. Excludes estimates of stated coupons, if any, on structured notes given the difficulty in predicting the value of the underlying.
 
We issue U.S. dollar and non-U.S. dollar-denominated long-term borrowings with both variable and fixed interest rates, as part of our overall funding strategy. For further information on funding and long-term borrowings, see the Capital and Funding section in our MD&A and Note 9 to the Consolidated Financial Statements. In the normal course of business, we enter into various noncancellable long-term operating lease agreements, various purchasing commitments, commitments to extend credit and other commitments. For detailed information regarding these commitments, see Note 11 to the Consolidated Financial Statements.
 
As disclosed in Note 14 of the Consolidated Financial Statements, Merrill Lynch has unrecognized tax benefits as of December 28, 2007 of approximately $1.5 billion in accordance with FIN 48. Of this total, approximately $1.2 billion (net of federal benefit of state issues, competent authority and foreign tax credit offsets) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods. As indicated in Note 14, unrecognized tax benefits with respect to the U.S. Tax Court case and the Japanese assessment, while paid, have been included in the $1.5 billion and the $1.2 billion amounts above. Due to the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, all FIN 48 liabilities which have not been paid have been excluded from the Contractual Obligations table.

         
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   Commitments
At December 28, 2007, our commitments had the following expirations:
 
                               
    EXPIRATION
        LESS THAN
  1–3
  3+–5
  OVER 5
(DOLLARS IN MILLIONS)   TOTAL   1 YEAR   YEARS   YEARS   YEARS
Commitments to extend credit(1)
  $ 78,232   $ 29,141   $ 12,274   $ 25,628   $ 11,189
Commitments to enter into forward dated resale and securities borrowing agreements
    20,943     20,659     284        
Commitments to enter into forward dated repurchase and securities lending agreements
    41,590     37,320     4,270        
                               
                               
(1) See Note 7 and Note 11 to the Consolidated Financial Statements.
 
   Capital and Funding
The primary objectives of our capital management and funding strategies are as follows:
 
•  Maintain sufficient long-term capital to support the execution of our business strategies and to achieve our financial performance objectives;
 
•  Ensure liquidity across market cycles and through periods of financial stress; and
 
•  Comply with regulatory capital requirements.
 
   Long-Term Capital
Our long-term capital sources include equity capital, long-term borrowings and certain deposits in bank subsidiaries that we consider to be long-term or stable in nature.
 
At December 28, 2007 and December 29, 2006 total long-term capital consisted of the following:
 
             
(DOLLARS IN MILLIONS)   2007   2006
Common equity(1)
  $ 27,549   $ 35,893
Preferred stock
    4,383     3,145
Trust preferred securities(2)
    4,725     3,323
             
Equity capital
    36,657     42,361
Subordinated long-term debt obligations
    10,887     6,429
Senior long-term debt obligations(3)
    156,370     120,122
Deposits(4)
    85,035     71,204
             
Total long-term capital
  $ 288,949   $ 240,116
             
             
(1) Includes $3.8 billion of equity in connection with common stock issuances to Temasek and Davis.
(2) Represents junior subordinated notes (related to trust preferred securities), net of related investments. The related investments are reported as investment securities and were $429 million at December 28, 2007 and $490 million at December 29, 2006.
(3) Excludes junior subordinated notes (related to trust preferred securities), the current portion of long-term borrowings and the long-term portion of other subsidiary financing that is non-recourse to or not guaranteed by ML & Co. Borrowings that mature in more than one year, but contain provisions whereby the holder has the option to redeem the obligations within one year, are reflected as the current portion of long-term borrowings and are not included in long-term capital.
(4) Includes $70,246 million and $14,789 million of deposits in U.S. and non-U.S. banking subsidiaries, respectively, at December 28, 2007, and $59,341 million and $11,863 million of deposits in U.S. and non-U.S. banking subsidiaries, respectively, at December 29, 2006 that we consider to be long-term based on our liquidity models.
 
At December 28, 2007, our long-term capital sources of $288.9 billion exceeded our estimated long-term capital requirements. In addition, on a pro forma basis for equity issuances completed subsequent to year-end and described on page 54, our pro forma long-term capital was $297.9 billion. See Liquidity Risk in the Risk Management Section for additional information.
 
   Equity Capital
At December 28, 2007, equity capital, as defined by Merrill Lynch, was $36.7 billion and comprised of $27.5 billion of common equity, $4.4 billion of preferred stock, and $4.7 billion of trust preferred securities. We define equity capital more broadly than stockholders’ equity under U.S. generally accepted accounting principles, as we include other capital instruments with equity-like characteristics such as trust preferred securities. We view trust preferred securities as equity capital because they are either perpetual or have maturities of at least 50 years at issuance. These trust preferred securities represent junior subordinated notes, net of related investments. Junior subordinated notes (related to trust preferred securities) are reported on the Consolidated Balance Sheets as liabilities for accounting purposes. The related investments are reported as investment securities on the Consolidated Balance Sheets.
 
We regularly assess the adequacy of our equity capital base relative to the estimated risks and needs of our businesses, the regulatory and legal capital requirements of our subsidiaries, standards required by the SEC’s CSE rules and capital adequacy methodologies of rating agencies. At December 28, 2007 Merrill Lynch was in compliance with applicable CSE standards. Refer to Note 15 to the

         
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Consolidated Financial Statements for additional information on regulatory requirements. We also assess the impact of our capital structure on financial performance metrics.
 
We have developed economic capital models to determine the amount of equity capital we need to cover potential losses arising from market, credit and operational risks. These models align closely with our regulatory capital requirements. We developed these statistical risk models in conjunction with our risk management practices, and they allow us to attribute an amount of equity to each of our businesses that reflects the risks of that business, both on- and off-balance sheet. We regularly review and periodically refine models and other tools used to estimate risks, as well as the assumptions used in those models and tools to provide a reasonable and conservative assessment of our risks across a stressed market cycle. We also assess the need for equity capital to support risks that we believe may not be adequately measured through these risk models.
 
In addition, we consider how much equity capital we may need to support normal business growth and strategic initiatives. In the event that we generate common equity capital beyond our estimated needs, we seek to return that capital to shareholders through share repurchases and dividends, considering the impact on our financial performance metrics. Likewise, we will seek to raise additional equity capital to the extent we determine it necessary.
 
Major components of the changes in our equity capital for 2007 and 2006 are as follows:
 
                 
(DOLLARS IN MILLIONS)   2007     2006  
Beginning of year
  $ 42,361     $ 38,144  
Net (loss)/earnings
    (7,777 )     7,499  
Issuance of common stock in connection with Temasek and Davis
    3,840        
Issuance of preferred stock, net of repurchases and re-issuances
    1,238       472  
Issuance of trust preferred securities, net of redemptions and related investments
    1,402       779  
Common and preferred stock dividends
    (1,505 )     (1,106 )
Common stock repurchases
    (5,272 )     (9,088 )
Net effect of employee stock transactions and other(1)(2)
    2,370       5,661  
                 
End of year
  $ 36,657     $ 42,361  
                 
                 
(1) Includes effect of accumulated other comprehensive loss and other items.
(2) 2006 amount includes the impact of our adoption of SFAS No. 123R and related policy modifications to previous stock awards, as well as accumulated other comprehensive loss and other items.
 
Our equity capital of $36.7 billion at December 28, 2007 decreased $5.7 billion, or 13%, from December 29, 2006. Equity capital decreased in 2007 primarily as a result of net losses, common stock repurchases and dividends. The equity capital decrease was partially offset by the issuance of common stock, the net issuance of preferred stock and trust preferred securities and the net effect of employee stock transactions. On a pro forma basis for equity issuances completed subsequent to year-end and described below, we had $45.6 billion of pro forma equity capital which was comprised of $29.9 billion in common equity, $11.0 billion in preferred stock and $4.7 billion in trust preferred securities.
 
Common Stock
On December 24, 2007, we reached agreements with each of Temasek and Davis, on behalf of various investors, to sell an aggregate of 116.7 million shares of newly issued common stock at a price of $48.00 per share, for aggregate proceeds of approximately $5.6 billion. Temasek purchased 55 million shares in December 2007 and the remaining 36.7 million shares in January 2008. In addition, Temasek and its assignees exercised options to purchase an additional 12.5 million shares of our common stock at a purchase price of $48.00 per share in February 2008. Davis purchased 25 million shares in December 2007. See “Other Information (Unaudited) — Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities” for additional detail on these transactions.
 
Upon closing the First Republic acquisition on September 21, 2007, we issued 11.6 million shares of common stock as a portion of the consideration.
 
On January 18, 2007, the Board of Directors declared a 40% increase in the regular quarterly dividend to 35 cents per common share.
 
During 2007, we repurchased 62.1 million common shares at an average repurchase price of $84.88 per share. On April 30, 2007 the Board of Directors authorized the repurchase of an additional $6 billion of our outstanding common shares. During 2007, we had completed the $5 billion repurchase program authorized in October 2006 and had $4.0 billion of authorized repurchase capacity remaining under the repurchase program authorized in April 2007. We did not repurchase any common stock during the fourth quarter of 2007 and do not anticipate additional repurchases of common shares.
 
Preferred Stock
On January 15, 2008, we reached agreements with several long-term investors to sell an aggregate of 66,000 shares of newly issued 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 1, par value $1.00 per share and liquidation preference $100,000 per share (the “Mandatory Convertible Preferred Stock”), at a price of $100,000 per share, for an aggregate

         
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purchase price of approximately $6.6 billion. We issued the Mandatory Convertible Preferred Stock on various dates in January and February 2008. See “Other Information (Unaudited) — Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities” for additional detail on these transactions.
 
In conjunction with the acquisition of First Republic on September 21, 2007 we issued $65 million of 6.70% non-cumulative perpetual preferred stock and $50 million of 6.25% non-cumulative preferred stock in exchange for First Republic’s preferred stock Series A and B, respectively.
 
On March 20, 2007, Merrill Lynch issued $1.5 billion of floating rate, non-cumulative, perpetual preferred stock.
 
Trust Preferred Securities
On March 30, 2007, Merrill Lynch Preferred Capital Trust II redeemed all of the outstanding $300 million of 8.00% trust preferred securities.
 
On May 2, 2007, Merrill Lynch Capital Trust II issued $950 million of 6.45% trust preferred securities and invested the proceeds in junior subordinated notes issued by ML & Co.
 
On August 22, 2007, Merrill Lynch Capital Trust III issued $750 million of 7.375% trust preferred securities and invested the proceeds in junior subordinated notes issued by ML & Co.
 
The table below sets forth the information with respect to purchases made by or on behalf of us or any “affiliated purchaser” of our common stock during the year ended December 28, 2007.
                         
            TOTAL NUMBER
  APPROXIMATE
            OF SHARES
  DOLLAR VALUE
            PURCHASED
  OF SHARES THAT
            AS PART OF
  MAY YET BE
    TOTAL NUMBER
  AVERAGE
  PUBLICLY
  PURCHASED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
  OF SHARES
  PRICE PAID
  ANNOUNCED
  UNDER THE
PERIOD   PURCHASED   PER SHARE   PROGRAM (1) PROGRAM
First Quarter 2007 (Dec. 30, 2006 – Mar. 30, 2007)
                       
Capital Management Program
    22,397,882   $ 89.31     22,397,882   $ 1,243
Employee Transactions(2)
    7,728,843   $ 91.33     N/A     N/A
                         
Second Quarter 2007 (Mar. 31, 2007 – Jun. 29, 2007)
                       
Capital Management Program
    19,802,094   $ 90.90     19,802,094   $ 5,443
Employee Transactions(2)
    1,010,173   $ 87.92     N/A     N/A
                         
Third Quarter 2007 (Jun. 30, 2007 – Sep. 28, 2007)
                       
Capital Management Program
    19,912,900   $ 73.91     19,912,900   $ 3,971
Employee Transactions(2)
    2,946,004   $ 75.30     N/A     N/A
                         
Month #10 (Sep. 29, 2007 – Nov. 2, 2007)
                       
Capital Management Program
      $       $ 3,971
Employee Transactions(2)
    1,011,787   $ 65.61     N/A     N/A
                         
Month #11 (Nov. 3, 2007 – Nov. 30, 2007)
                       
Capital Management Program
      $       $ 3,971
Employee Transactions(2)
    1,069,077   $ 55.33     N/A     N/A
                         
Month #12 (Dec. 1, 2007 – Dec. 28, 2007)
                       
Capital Management Program
      $       $ 3,971
Employee Transactions(2)
    527,888   $ 56.40     N/A     N/A
                         
Fourth Quarter 2007 (Sep. 29, 2007 – Dec. 28, 2007)
                       
Capital Management Program
      $       $ 3,971
Employee Transactions(2)
    2,608,752   $ 59.54     N/A     N/A
                         
Full Year 2007 (Dec. 30, 2006 – Dec. 28, 2007)
                       
Capital Management Program
    62,112,876   $ 84.88     62,112,876   $ 3,971
Employee Transactions(2)
    14,293,772   $ 81.98     N/A     N/A
                         
                         
(1) Share repurchases under the program were made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions as market conditions warranted and at prices that we deemed appropriate.
(2) Included in the total number of shares purchased are: (1) shares purchased during the period by participants in the Merrill Lynch 401(k) Savings and Investment Plan (“401(k)”) and the Merrill Lynch Retirement Accumulation Plan (“RAP”), (2) shares delivered or attested to in satisfaction of the exercise price by holders of ML & Co. employee stock options (granted under employee stock compensation plans) and (3) Restricted Shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon vesting and release of Restricted Shares. ML & Co.’s employee stock compensation plans provide that the value of the shares delivered, attested, or withheld, shall be the average of the high and low price of ML & Co.’s common stock (Fair Market Value) on the date the relevant transaction occurs. See Notes 12 and 13 to the Consolidated Financial Statements for additional information on these plans.

         
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   Balance Sheet Leverage
Assets-to-equity leverage ratios are commonly used to assess a company’s capital adequacy. We believe that a leverage ratio adjusted to exclude certain assets considered to have low risk profiles and assets in customer accounts financed primarily by customer liabilities provides a more meaningful measure of balance sheet leverage in the securities industry than an unadjusted ratio. We calculate adjusted assets by reducing total assets by (1) securities financing transactions and securities received as collateral less trading liabilities net of derivative contracts and (2) segregated cash and securities and separate accounts assets.
 
As leverage ratios are not risk sensitive, we do not rely on them to measure capital adequacy. When we assess our capital adequacy, we consider more sophisticated measures that capture the risk profiles of the assets, the impact of hedging, off-balance sheet exposures, operational risk, regulatory capital requirements and other considerations.
 
The following table provides calculations of our leverage ratios at December 28, 2007 and December 29, 2006:
 
                 
(DOLLARS IN MILLIONS)   2007     2006  
Total assets
  $ 1,020,050     $ 841,299  
Less: Receivables under resale agreements
    221,617       178,368  
Receivables under securities borrowed transactions
    133,140       118,610  
Securities received as collateral
    45,245       24,929  
Add: Trading liabilities, at fair value, excluding derivative contracts
    50,294       56,822  
                 
Sub-total
    670,342       576,214  
Less: Segregated cash and securities balances
    22,999       13,449  
Separate accounts assets
          12,314  
                 
Adjusted assets
    647,343       550,451  
Less: Goodwill and intangible assets
    5,091       2,457  
                 
Tangible adjusted assets
  $ 642,252     $ 547,994  
                 
Stockholders’ equity
  $ 31,932     $ 39,038  
Add: Trust preferred securities(1)
    4,725       3,323  
                 
Equity capital
  $ 36,657     $ 42,361  
Tangible equity capital(2)
  $ 31,566     $ 39,904  
Leverage ratio(3)
    27.8 x     19.9 x
Adjusted leverage ratio(4)
    17.7 x     13.0 x
Tangible adjusted leverage ratio(5)
    20.3 x     13.7 x
                 
                 
(1) Represents junior subordinated notes (related to trust preferred securities), net of related investments. The related investments are reported as investment securities and were $429 million and $490 million at December 28, 2007 and December 29, 2006, respectively.
(2) Equity capital less goodwill and other intangible assets.
(3) Total assets divided by equity capital.
(4) Adjusted assets divided by equity capital.
(5) Tangible adjusted assets divided by tangible equity capital.
 
The table above does not reflect the impact of the following transactions that occurred subsequent to our 2007 year end:
 
•  Issuance of 49.2 million shares of common stock for $2.4 billion during the first quarter of 2008 in connection with our agreement with Temasek;
 
•  Issuance of 66,000 shares of our 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 1 (convertible into a maximum of 126 million shares of common stock) for approximately $6.6 billion during the first quarter of 2008 to long-term investors, including the Korea Investment Corporation, Kuwait Investment Authority and Mizuho Corporate Bank; and
 
•  On a pro forma basis for equity issuances completed subsequent to year-end and described above, our pro forma leverage ratio, adjusted leverage ratio and tangible adjusted leverage ratio would have been 22.6x, 14.4x, and 16.1x, respectively.
 
See “Other Information (Unaudited) — Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities” for additional detail on these transactions.
 
   Funding
We fund our assets primarily with a mix of secured and unsecured liabilities through a globally coordinated funding strategy. We fund a portion of our trading assets with secured liabilities, including repurchase agreements, securities loaned and other short-term secured borrowings, which are less sensitive to our credit ratings due to the underlying collateral. A portion of our short-term borrowings are secured under a master note lending program. These notes are similar in nature to other collateralized financing sources such as securities sold under agreements to repurchase. Refer to Note 9 to the Consolidated Financial Statements for additional information regarding our borrowings.

         
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We use unsecured liabilities to fund certain trading assets, as well as other long-dated assets not funded with equity. Our unsecured liabilities consist of the following:
 
             
(DOLLARS IN MILLIONS)   DEC. 28, 2007   DEC. 29, 2006
Commercial paper
  $ 12,908   $ 6,357
Promissory notes
    2,750    
Other unsecured short-term borrowings(1)
    4,405     1,953
Current portion of long-term borrowings(2)
    63,307     37,720
             
Total unsecured short-term borrowings
    83,370     46,030
             
Senior long-term borrowings(3)
    156,370     120,122
Subordinated long-term borrowings
    10,887     6,429
             
Total unsecured long-term borrowings
    167,257     126,551
             
Deposits
  $ 103,987   $ 84,124
             
             
(1) Excludes $4.9 billion and $9.8 billion of secured short-term borrowings at December 28, 2007 and December 29, 2006, respectively; these short-term borrowings are represented under a master note lending program.
(2) Excludes $1.7 billion and $460 million of the current portion of other subsidiary financing that is non-recourse or not guaranteed by ML & Co. at December 28, 2007 and December 29, 2006, respectively.
(3) Excludes junior subordinated notes (related to trust preferred securities), current portion of long-term borrowings, secured long-term borrowings, and the long-term portion of other subsidiary financing that is non-recourse or not guaranteed by ML & Co.
 
Our primary funding objectives are maintaining sufficient funding sources to support our existing business activities and future growth while ensuring that we have liquidity across market cycles and through periods of financial stress. To achieve our objectives, we have established a set of funding strategies that are described below:
 
•  Diversify funding sources;
 
•  Maintain sufficient long-term borrowings;
 
•  Concentrate unsecured funding at ML & Co.;
 
•  Use deposits as a source of funding; and
 
•  Adhere to prudent governance principles.
 
Diversification of Funding Sources
We strive to diversify and expand our funding globally across programs, markets, currencies and investor bases. We issue debt through syndicated U.S. registered offerings, U.S. registered and unregistered medium-term note programs, non-U.S. medium-term note programs, non-U.S. private placements, U.S. and non-U.S. commercial paper and through other methods. We distribute a significant portion of our debt offerings through our retail and institutional sales forces to a large, diversified global investor base. Maintaining relationships with our investors is an important aspect of our funding strategy. We also make markets in our debt instruments to provide liquidity for investors.
 
At December 28, 2007 and December 29, 2006 our total short- and long-term borrowings were issued in the following currencies:
 
                             
(USD EQUIVALENT IN MILLIONS)   2007         2006      
USD
  $ 165,285     57 %   $ 120,852     61 %
EUR
    74,207     26       43,323     22  
JPY
    16,879     6       11,822     6  
GBP
    9,303     3       10,228     5  
AUD
    5,455     2       3,777     1  
CAD
    5,953     2       2,727     1  
CHF
    2,283     1       1,487     1  
INR
    1,964     1       1,461     1  
Other(1)
    4,558     2       3,833     2  
                             
Total
  $ 285,887     100 %   $ 199,510     100 %
                             
                             
Note: Excludes junior subordinated notes (related to trust preferred securities).
(1) Includes various other foreign currencies, none of which individually exceed 1% of total issuances.
 
We also diversify our funding sources by issuing various types of debt instruments, including structured notes. Structured notes are debt obligations with returns that are linked to other debt or equity securities, indices, currencies or commodities. We typically hedge these notes with positions in derivatives and/or in the underlying instruments. We could be required to immediately settle certain structured note obligations for cash or other securities under certain circumstances, which we take into account for liquidity planning purposes. Structured notes outstanding were $59.0 billion and $33.8 billion at December 28, 2007 and December 29, 2006, respectively.

         
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Extendible notes are debt obligations that provide the holder an option to extend the note monthly but not beyond the stated final maturity date. These notes are included in the long-term borrowings while the time to the stated final maturity is greater than one year. Total extendible notes outstanding were $1.8 billion and $11.4 billion at December 28, 2007 and December 29, 2006, respectively. Consistent with the market environment for this type of security, the majority of extendible notes holders elected not to extend their note’s maturity during the second half of 2007. The amount that has not been extended is included in the current portion of long-term borrowings.
 
Maintenance of Sufficient Long-Term Borrowings
An important objective of our asset-liability management is maintaining sufficient long-term borrowings to meet our long-term capital requirements. As such, we routinely issue debt in a variety of maturities and currencies to achieve cost efficient funding and an appropriate maturity profile. While the cost and availability of unsecured funding may be negatively impacted by general market conditions or by matters specific to the financial services industry or Merrill Lynch, we seek to mitigate this refinancing risk by actively managing the amount of our borrowings that we anticipate will mature within any one month or quarter.
 
At December 28, 2007, the weighted average maturity of our long-term borrowings exceeded four years. The following chart presents our long-term borrowings maturity profile as of December 28, 2007 (quarterly for two years and annually thereafter):
 
(LONG-TERM DEBT MATURITY PROFILE GRAPH)
 
 
The $65 billion of long-term debt maturing in 2008 consists of the following:
 
       
(DOLLARS IN BILLIONS)    
2008 consolidated unsecured long-term debt maturities
  $ 65.0
Less: non-recourse debt and debt not guaranteed by ML & Co
    1.7
Less: warrant maturities(1)
    10.1
       
ML & Co. maximum long-term debt maturities in 2008
    53.2
Less: ML & Co. debt that may potentially mature in 2008, final maturity beyond 2008(2)
    9.3
       
ML & Co. contractual long-term debt maturities in 2008
  $ 43.9
       
       
(1) Warrants are customer funded facilitation trades.
(2) Consists of structured notes that are callable based on certain market triggers and our LYONs® that can be redeemed by holders in March 2008. See Note 9 to the Consolidated Financial Statements for futher information on our LYONs® and structured notes.
 
Major components of the change in long-term borrowings, excluding junior subordinated debt (related to trust preferred securities), for 2007 and 2006 were as follows:
 
                 
(DOLLARS IN BILLIONS)   2007     2006  
Beginning of year
  $ 181.4     $ 132.4  
Issuance and resale
    150.6       86.8  
Settlement and repurchase
    (80.1 )     (42.2 )
Other(1)
    9.1       4.4  
                 
End of year(2)
  $ 261.0     $ 181.4  
                 
                 
(1) Relates to foreign exchange and other movements.
(2) See Note 9 to the Consolidated Financial Statements for the long-term borrowings maturity schedule.
 
Subordinated debt is an important component of our long-term borrowings. During 2007, ML & Co. issued $4.4 billion of subordinated debt in multiple currencies with maturities ranging from 2017 to 2037. This subordinated debt was issued to satisfy certain anticipated CSE capital requirements. All of ML & Co.’s subordinated debt is junior in right of payment to ML & Co.’s senior indebtedness.
 
At December 28, 2007, senior and subordinated debt issued by ML & Co. or by subsidiaries and guaranteed by ML & Co., including short-term borrowings, totaled $250.5 billion. Except for the $2.2 billion of zero-coupon contingent convertible debt (Liquid Yield Option Notes

         
Merrill Lynch 2007 Annual Report   page 58    


Table of Contents

or “LYONs®”) outstanding at December 28, 2007 and the three-year multi-currency, unsecured bank facility discussed in Committed Credit Facilities, senior and subordinated debt obligations issued by ML & Co. and senior debt issued by subsidiaries and guaranteed by ML & Co. do not contain provisions that could, upon an adverse change in ML & Co.’s credit rating, financial ratios, earnings, cash flows, or stock price, trigger a requirement for an early repayment, additional collateral support, changes in terms, acceleration of maturity, or the creation of an additional financial obligation. See Note 9 to the Consolidated Financial Statements for additional information.
 
We use derivative transactions to more closely match the duration of borrowings to the duration of the assets being funded, thereby enabling interest rate risk to be within limits set by our Market Risk Management group. Interest rate swaps also serve to convert our interest expense and effective borrowing rate principally to floating rate. We also enter into currency swaps to hedge assets that are not financed through debt issuance in the same currency. We hedge investments in subsidiaries in non-U.S. dollar currencies in whole or in part to mitigate foreign exchange translation adjustments in accumulated other comprehensive loss. See Notes 1 and 3 to the Consolidated Financial Statements for further information.
 
Concentration of Unsecured Funding at ML & Co.
ML & Co. is the primary issuer of all unsecured, non-deposit financing instruments that we use predominantly to fund assets in subsidiaries, some of which are regulated. The primary benefits of this strategy are greater control, reduced funding costs, wider name recognition by investors, and greater flexibility to meet variable funding requirements of subsidiaries. Where regulations, time zone differences, or other business considerations make this impractical, certain subsidiaries enter into their own financing arrangements.
 
Deposit Funding
At December 28, 2007, our global bank subsidiaries had $104.0 billion in customer deposits, which provide a diversified and stable base for funding assets within those entities. Our U.S. deposit base of $76.6 billion includes an estimated $59.7 billion of FDIC-insured deposits, which we believe are less sensitive to our credit ratings. We predominantly source deposit funding from our customer base in the form of our bank sweep programs and time deposits. In addition, the acquisition of First Republic has further diversified and enhanced our bank subsidiaries deposit funding base.
 
Deposits are not available as a source of funding to ML & Co. See Liquidity Risk in the Risk Management section for more information regarding our deposit liabilities.
 
Prudent Governance
We manage the growth and composition of our assets and set limits on the overall level of unsecured funding. Funding activities are subject to regular senior management review and control through Asset/Liability Committee meetings with treasury management and other independent risk and control groups. Through 2007 our funding strategy and practices were reviewed by the Risk Oversight Committee (“ROC”), our executive management and the Finance Committee of the Board of Directors. In 2008, the responsibility of the ROC in this regard has been assumed by the Regulatory Oversight and Controls Committee.
 
Credit Ratings
Our credit ratings affect the cost and availability of our unsecured funding, and it is our objective to maintain high quality credit ratings. In addition, credit ratings are important when we compete in certain markets and when we seek to engage in certain long-term transactions, including OTC derivatives. Factors that influence our credit ratings include the credit rating agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, our reputation, level and volatility of our earnings, our corporate governance and risk management policies, and our capital management practices.
 
The following table sets forth ML & Co.’s unsecured credit ratings as of February 15, 2008. Rating agencies express outlooks from time to time on these credit ratings. Ratings from Fitch Ratings, Moody’s Investor Service, Inc., and Standard & Poor’s Ratings Services reflect one-notch downgrades from those agencies on October 24, 2007. Rating outlooks from those agencies remain negative, where they were placed on October 5, 2007. Also, on October 24, 2007, Dominion Bond Rating Service Ltd. affirmed the Company’s ratings and outlook as stable. On December 7, 2007, Rating & Investment Information, Inc. (Japan) downgraded the Company’s long-term and subordinated debt ratings. The outlook on these ratings remains negative, where they were placed on October 25, 2007. Following our announcement of fourth quarter and full-year 2007 results on January 17, 2008, all five agencies affirmed their ratings and outlooks.
 
                                     
    SENIOR
          PREFERRED
         
    DEBT
    SUBORDINATED
    STOCK
  COMMERCIAL
    RATING
RATING AGENCY   RATINGS     DEBT RATINGS     RATINGS   PAPER RATINGS     OUTLOOK
Dominion Bond Rating Service Ltd. 
    AA (low )     A (high )     A     R-1 (middle )     Stable
Fitch Ratings
    A+       A       A     F1       Negative
Moody’s Investors Service, Inc. 
    A1       A2       A3     P-1       Negative
Rating & Investment Information, Inc. (Japan)
    AA-       A+       Not Rated     a-1+       Negative
Standard & Poor’s Ratings Services
    A+